Another cool week for the nation as Taranaki forecasts a cold wet spring, Southlands pasture cover is well behind last year, and Manawatu farmers are bemoaning the wetest winter on record.
Calving is progressing well and managers have been ruthless in culling late calvers and any inefficient cows, as they look to minimize the losses in this difficult year.
DairyNZ is leading the charge with pasture feed management the focus in it's advice, as the potential to create and utilise quality grass to drive production has been found wanting in some farmers management skills.
One negative outcome of the heavy cow cull, is the loss of beef cross bobby calves conceived in these late cows, that the beef sector is desperate to purchase.
Recent activity on the milk futures market indicated a market lift, and so it proved overnight, as a reduced volume milk auction lifted across the board by 10.9% and whole milk powders by 12%.
This is the second rise in a row for the global platform and analysts are in agreement the bottom has been reached, and now it is a slow grind back to economic sustainability that will only continue if global milk volumes ease.
More evidence of the sectors pain, is seen with the loss in equity and profits by sharemilkers, support workers jobs at risk at Fonterra's Clandeboye plant, the milk intervention process starting in Europe, and Rabobank warning low prices could be here for longer than earlier expected.
Landcorp have announced a big drop in profit as a result of the dairy downturn, but last season was saved somewhat by the extensive use of the guaranteed milk price scheme.
Fonterra’s purchase of shares in Beingmate suffered a $200 million dollar hit as a result of the Chinese sharemarket crash and this will put further pressure on the payout.
Interest in goat and sheep milk schemes builds, as farmers may have to look past the cow and powder production, in favour of more specialist operations to convert pasture into milk.
By Keith Woodford*
In recent weeks I have been travelling in Western China. It is just over a year since I was last there, and as with every visit the changes are visible: more fast railways, more four lane highways, and lots more apartment buildings.
This visual perspective contrasts with what we are reading in the media about China’s declining economic growth. Which is correct? Well, both perspectives are valid.
There are many ‘Chinas’ but for simplicity I will divide China into two. There is the eastern seaboard comprising Beijing, Shanghai, Guangzhou, Tianjin, Zhejiang, Shenzhen and other big seaboard cities. And there is another China west of the seaboard, including Chengdu, Chongqing, Xian, Wuhan, Kunming, and Xining.
The China that is west of the seaboard beats to a different drum. This China has about 150 cities of more than a million people, and some cities of more than ten million people. It also includes more than 500 million rural folk. In many ways it is at least ten years behind the seaboard China.
First of all, what is happening on the seaboard? Nothing in China is simple, but there is little doubt that on the seaboard there are signs of a confidence crisis.
The rapid decline of Chinese share markets does not in itself spell gloom. After all, the decline has done little more than wipe out the crazy share market gains of earlier this year. But the impact will be pervasive in terms of how people think. People are asking: are the good times over? They are asking themselves as to whether they should be more careful in what they spend.
In recent years, one of the things I have learned about China is that the people are ‘hardwired’ to focus on survival. Many generations have had the realities of poverty ingrained into them as the normal and expected state. The key survival strategy is to save whenever possible and look after oneself and family. Outside the family, no-one can be relied upon. Those cultural essentials are now being reinforced.
If economic growth is to continue on the seaboard, then people have to spend. Currently, Chinese save about half their wages and salaries. Those savings have fuelled the infrastructure development of the last 20 years. But on the seaboard, there are now less big infrastructure projects. The last thing that China now needs is for seaboard consumers to go into survival mode.
Out in the west, things are different. The Shanghai share market has no meaning. It is something one reads about in the newspaper, but that is all.
One of the western cities I visit regularly is Xining in Qinghai Province. Xining is the gateway to the Qinghai-Tibetan plateau. The reason I go there is because, together with Lincoln University and Qinghai University colleagues, I am part of a grassland sustainability project on the Qinghai-Tibetan Plateau at an altitude of 3600 metres. I will write more about that project at another time.
Xining lies at intermediate altitudes – about 2200 metres – at the interface between the plains and the plateau. Tributaries of the Yellow River tumble down from the plateau through winding gorges and narrow valleys.
In winter, Xining is desperately cold, but in late August the temperatures there are mild. In contrast, down on the plains it is like being in a furnace. Those who can afford it retreat to Xining for some sanity.
The permanent population of Xining is about 2 million, but in summer that increases. I have been coming here for four years and the changes are stark. There are hundreds of new apartment buildings, typically of about 20 floors. There is a new airport of international standard. The rail journey from Lanzhou, 253 km to the east, now takes only one hour and six minutes.
And raising my eyes to the hills, I see precipitous and arid slopes that are slowly turning green from millions of trees planted in recent years. No-one should make the mistake of thinking that China is not taking environmental matters seriously. The problem is that most of the answers are not easy.
Up on the plateau, the people are mainly Tibetan pastoralists, but down in the city the population is predominantly a mix of Han and Hui people. The Han are the predominant ethnic group of China. The Hui are of similar ethnicity but they are followers of the Muslim religion, with historical religious links to Iran.
Commercial life in Xining is dominated by the Han, but there are lots of Muslim restaurants, and one of my earliest acquaintances there is a Muslim official who has also represented China abroad. In Xining, there is religious freedom and religious tolerance. At the risk of being repetitive: nothing is simple in China.
Over the years I can only recall seeing one Westerner in Xining apart from our own group, but no doubt there are lots of Westerners here. In a city of two million, they are easy to miss.
Unlike forty years ago when I first visited China, we attract no attention from the locals. This contrasts with my first visit to China way back in 1973, when even in Shanghai I would have hundreds of children following me in the streets.
One way or another, New Zealand produce is starting to get to Xining. In a city supermarket I saw two one-litre packs of Fonterra’s ‘Country Goodness’ UHT milk, seriously over-priced at 29 RMB (almost $NZ7 per litre) and close to its use-by date.
In contrast, Murray Goulburn’s ‘Devondale’ UHT milk from Australia was selling well, with comprehensive shelf space, at 15 RMB (about $NZ3.50) per litre. I have been watching the development of the Devondale brand in China for several years. Fonterra needs to take a look.
In the same supermarket there was a small but diverse offering of ‘Mainland ‘cheese from Fonterra. It was selling in packs of 200g to 400g for between $NZ40 and $NZ60 per kg. It was nicely presented.
Zespri Sungold kiwifruit were on sale alongside Chinese kiwifruit from Hainan, all at the same price of 58 RMB per 500g (about $NZ27per kg). Zespri kiwifruit is the premium brand in China and the temptations of fake branding are considerable. But these looked genuine.
Genuine New Zealand honey (‘Meion’) was also on sale. Prices ranged from $NZ60 for 375 g of 5+UMF (unique manuka factor) to $NZ100 for 350g of 15+ UMF.
There was lots of French wine on sale, and also some Jacobs Creek red wine from Australia at 160 RMB (about $NZ38) per bottle. But there was no wine from New Zealand. The shop assistant said that purchasers have a strong preference for French wine. This is consistent with behaviours of our own hosts, who typically supply French or Italain wine, occasionally Chinese wine.
Local sliced lamb flap (frozen) was available at $NZ13 - $NZ15 per kg, and bone-in frozen leg was $15 per kg.
The big message in all of this is that in New Zealand we have to recognise the diversity of China and act accordingly. On the seaboard the competition is incredibly fierce, and as commercial latecomers we are very much at a disadvantage. But out west, there are lots of opportunities and the competition is much less fierce.
Xining is just one example of many large cities and it is not necessarily the place to start. If I were a commercial person wanting to break through into China, I would be giving serious thought to cities like Xi’an, Kunming and Chengdu.
Taking Kunming as an example, it has a population of about 6 million, and it is the capital of Yunnan which has a population of about 50 million. It is one of my favourite Chinese cities, with mild year-round temperatures, sunny skies, and a diverse ethnic mix of minority peoples. As for Xi’an, it and surrounding areas have an urban population of about 13 million (plus terracotta warriors) and this is the centre of China’s aerospace industry.
As the Americans said of their own country more than a hundred years ago: go West, young man!
Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. This a regular column here. His archived writings are available at http://keithwoodford.wordpress.com
Content supplied by Federated Farmers
Banks are providing much needed support to New Zealand’s dairy industry during this period of desperately low prices, a survey from Federated Farmers has revealed.
Only 6.6% of dairy farmers say they have come under undue pressure from banks over their mortgage. Just 5.7% are dissatisfied with banks over their mortgages and as little as 3.1% are unhappy about the quality of communication from banks over the past three months.
Across all farming industries the level of dissatisfaction over mortgages is even less (5.2%), with 5.5% saying they have come under undue pressure in this area and 3.5% unhappy with how banks are communicating with them.
The survey was conducted the week following Fonterra’s announcement on 7 August of a forecast payout to farmers of $3.85 per kilogram of milk solids, and Federated Farmers President Dr William Rolleston says the organisation took the step because it was vital the industry knew exactly what level of support it was receiving.
“The support of banks is absolutely critical in these market conditions. They have the ability to make a significant difference to farmers, the industry and the economy if they work constructively and take a long term view.”
“The high levels of satisfaction our survey has identified are extremely encouraging for the dairy industry, but at the same time it’s concerning that some farmers are coming under pressure from banks. We are following this up and continue to urge banks to stand by the industry. A repeat of this survey in November will tell us whether they have.”
The Federated Farmers survey also found that 25% of dairy farmers do not have a detailed budget for the current season. This compares with 33% of all farmers.
“More than 10% do not have a mortgage and many more have very low levels of debt so this is not entirely surprising, however we remind farmers that, particularly in difficult market conditions, it is important to review your budgets and obtain expert advice from your bank, accountant and farm advisor,” says Dr Rolleston.
New Zealand Bankers’ Association Chief Executive Kirk Hope says it is helpful to have the survey by Federated Farmers confirm that banks are working closely with dairy farmers to help them manage through tough times.
“There’s a range of measures available across the banking sector, and banks will continue to provide assistance according to the particular circumstances involved.”
“Two-way communication in times of financial stress is essential, and the survey overwhelmingly shows that’s happening on the ground. This helps farmers facing challenges to act early and have a plan and a budget in place, which is what’s needed to get through,” says Mr Hope.
The Federated Farmers Banking Survey was completed by 1,300 farmers around New Zealand (over half of them in the dairy industry). Click herefor a breakdown of results by region and farming industry.
By David Hargreaves
Dairy prices rebounded again at the latest GlobalDairyTrade auction held in the early hours of the morning.
The average price achieved at the latest auction for all products was $2226 per metric tonne, which on an unadjusted basis gave a rise of nearly 12.8% from the $1974/MT at the last auction. The GDT Index, which measures all products, but makes certain adjustments to give a value-weighted average of price, was up 10.9%.
The key whole milk powder (WMP) prices climbed back above the $2000MT mark, with a 12% gain to $2078.
However, while the latest rally in prices, following on from a 14.8% rise in the GDT Index in the auction two weeks ago, will be encouraging for farmers, it needs putting in perspective.
The rises in the last two auctions have basically only taken prices back to the levels they were in June, at which point we were in the middle of 10 consecutive auctions of price falls. The GDT Index, even after the latest gain, is some 32.2% lower than it was in March after there had been something of a rally in prices due to expectation of lower production in New Zealand on the back of a drought. In the event the effects of that drought were quickly overcome and milk production in the past season was actually higher than in the year before.
ANZ senior economist Mark Smith and economist Dylan Eades said the WMP prices at the latest auction were still below the US$2200 required to deliver Fonterra’s $3.85 per kilogram of milk solids for 2015/16, "but are moving in right direction".
They said the volumes sold at the latest auction (35,865 MT) were down on the 36,904 MT sold in the previous event and well below the 57,010 MT sold this time last year.
The recovery in the prices at the last auction and the latest one came following drastic action from Fonterra to reduce the amount of product, particularly WMP, it makes available through the GDT. Fonterra's managing director global ingredients, Kelvin Wickham says Fonterra is now selling approximately 70% of its total product via channels other than GDT "and as a result we do not expect a material impact on inventories”.
Westpac economists indicated that they would be revising their milk price forecast upward later today (from a current pick of $3.70).
But Westpac senior economist Michael Gordon said they were "hesitant" about assuming further substantial price gains in coming auctions, as the milk supply situation remained unclear.
"The global dairy market has so far reacted strongly to Fonterra's forecast of a 1.5% drop in milk collection for this season. But for higher prices to be sustained, dairy farmers will have to live up to that forecast over the coming months. We also need to see the other major dairy-exporting nations join in - the somewhat dated figures we have at present (up to June) show an acceleration in Northern Hemisphere milk production, not a slowdown," he said.
ANZ's Smith and Eades said low prices were expected to continue to take their toll on production.
"...Putting aside weather events – we expect a slowdown, via fewer herd numbers and less use of supplementary feed.
"However, as yet we are not seeing a decline in supply from the US or Europe. With oil prices falling sharply overnight (partly reversing earlier moves), it will take more than concerns over supply to provide meaningful lifts in commodity prices; demand will also need to come to the party.
"All eyes remain on China to provide more demand-side spine. But recent equity market volatility and the soft data pulse are not good signs."
'First leg of trifecta nears completion'
Meanwhile, ASB rural economist Nathan Penny said sentiment has turned and additional significant price increases are now effectively contingent on weaker New Zealand production.
"The first leg of the dairy price trifecta is nearing completion. Namely, dairy market sentiment has turned. And prices have mostly regained the losses incurred over July and August. Attention now squarely turns to the second more difficult leg of dairy price trifecta. Namely, a drop or material slowing in NZ dairy supply," said Penny.
"At this stage, we expect production to fall. Farmers have culled aggressively so far this year, supplementary feed is uneconomic for most, and there is high risk that el Niño causes a drought this summer. On this basis, we forecast this season’s production to fall 1% compared to last season."
"But over the next few months, we expect price increases to slow. Moreover, markets are yet to be convinced that NZ production is slowing. They prefer cold hard data to forecasts, and data to confirm weak production may not be available for several months. This fact highlights that there is still a long road ahead in the dairy price recovery," Penny added.
ASB's economists are sticking with their $4.50/kg forecast for this season.
By Allan Barber*
Good company performance demands clarity of purpose which is defined and monitored by a board of directors elected or appointed by the shareholders. There are five main types of company ownership structure that are or have been represented in New Zealand’s agricultural sector and each has advantages and disadvantages.
The five are private and public companies, cooperatives, subsidiaries of an overseas company and State Owned Enterprises. Whatever the structure, good governance and direction are pre-requisites of success.
A privately owned company normally has the greatest clarity of purpose because of the simplicity of the ownership structure, although there is plenty of scope for disputes between individual shareholders, particularly family members. Private company structures range from very simple to more complicated, depending on relative size of shareholdings and the number and origin of the shareholders.
Examples of private agricultural, predominantly meat, companies are Talley’s, ANZCO Foods, Wilson Hellaby, Greenlea and Universal Beef Packers. This short list illustrates the possible shareholdings from 100% New Zealand to 100% overseas ownership with variations in between. Without exception these companies have a good track record of success over an extended period.
Cooperatives provide the other major ownership structure in agriculture because the sector is typified by large groups of producers or users with a common interest. Cooperatives exist to serve the interests of and are democratically owned and controlled by their members. Surplus profits not required for investment are returned to the members, in proportion to usage and shareholding as rebates or dividends.
In 2013 over half the 20 largest cooperatives were agricultural companies, Fonterra being the largest by far and Silver Fern Farms, Alliance, Ravensdown, Balance, CRT and Farmlands all in the top 10. Another very significant grower owned company, Zespri, is not technically a cooperative, but appears to comply with most of the characteristics of one.
Cooperative performance in agriculture production and marketing depends heavily on the state of commodity markets and on throughput. When prices are low, growers may earn less than their cost of production, as is currently the case with sheepmeat and dairy, and shareholder dissatisfaction can be expressed in different ways. Removal of sitting board members, shareholder minorities attempting to influence board direction and supplying another company are three options.
The difficulty with cooperative ownership is retention of sufficient funds for investment, particularly where long term strategy conflicts with short term grower returns. Fonterra’s value added strategy and Silver Fern Farms’ efforts to develop brand equity with a highly leveraged balance sheet are two prime examples of cooperative tension.
Public companies are subject to stock exchange scrutiny and performance is measured by share price movements. AFFCO’s experience in the 1990s as a listed company indicates the problem of meeting investor expectations and managing for optimal outcomes in a volatile commodity environment. As a result there aren’t many agricultural listings on the NZX: exceptions are A2Milk, Comvita, PGG Wrightson, and Seeka Kiwifruit, as well as Fonterra units.
In the case of a State Owned Enterprise which is required to operate like a company the taxpayers are the shareholders and two shareholding ministers oversee performance with the help of Treasury’s Commercial Outcomes group. An appointed board of directors is responsible for SOE governance and direction.
A recent example of confused SOE governance was Bill English’s statement, suggesting SOE Landcorp would have to sell farmland to reduce its very conservative level of debt. It wasn’t immediately clear whether this was a case of the Finance Minister being gun shy following Solid Energy’s voluntary administration or a sudden fit of the jitters as a result of the dairy downturn. Either way it wasn’t helpful to Landcorp’s board and management who have a long term strategic direction aimed at spreading risk across a broad portfolio of farming types.
There are divergent views on whether the taxpayer should own a farming entity like Landcorp in the first place, but it shouldn’t be seen solely as a generator of dividends, because profits will fluctuate, as in any other farming enterprise. Landcorp’s value lies in its scale as the country’s largest farmer committed to sustainability, with an unmatched genetic databank and the ability to trial and develop innovative new products.
It is critically important for Landcorp to be able to maintain a long term view, not be required to respond to short term government demands.
The last business type which is no longer represented in New Zealand agriculture is the colonial outpost ownership by a large family owned trading company like Dalgety, Vestey and Borthwick. Although this lasted beyond Britain’s entry into the EU, it was a thing of the past by the 1990s. Overseas investment is now more likely to be in the form of a controlling, but not sole ownership stake.
There is clearly a place for several different forms of ownership in our agricultural sector, with private companies and cooperatives being the preferred options. Public listing is not generally the best form of ownership and the SOE model only has limited application.
Where there is a large shareholder supplier or user group and a clear business goal of rewarding members, the cooperative model works best. But equally the private ownership model works very well when there is a need for external investment and shareholders can agree on the business priorities.
The quality of the board and ability to stick to a clearly expressed business purpose is the ultimate determinant of success.
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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at firstname.lastname@example.org or read his blog here ». This article first appeared in Farmers Weekly. It is here with permission.
Venison prices break through the $8 barrier this week as chilled game processing gets into full swing and a more favourable currency has seen prices pass last years levels.
Producers report yearling stags, including the revenue from spiker velvet, should make $500 a head and return this sector to profit after years of decline.
And deer researchers say they are close to identifying the immune boosting properties of velvet that make this unique product so valuable in Asian medicine.
Deer Industry NZ has invested heavily in velvet research to ensure that customers understand the value in this product and create more markets other than the East to sell future volumes.
Spring lamb schedules move upwards in response to chilled demand and a more favourable currency, as processors encourage sales with significant premiums.
Processing numbers close in on the 20 million mark in the penultimate month, and new season lambs are now evident on low land properties.
Prospects for the Christmas market look reasonable, but the price of frozen product produced after this, will depend on how much stock is being carried by our main market destinations.
Prime lambs sold at saleyards are moving steadily up in the north driven by local trade pricing, while prices in the south remain stalled.
More changes are to be seen on the Alliance board as two of the senior directors retire, and with only the chairman having more than four years’ experience, it will be new faces making the tough decisions on the company’s future direction.
The industry levy vote reaches the half way stage as Beef and Lamb NZ seek to retain funding in its role of promoting and organizing the red meat sector.
Despite a currency reduction, last weeks South Island wool auction lost ground as lack of confidence in global markets and limited support from China, shaken by it’s share market troubles, saw indicators ease.
Prices are however well ahead of last year for all micron levels, and with very low stocks on hand this should underpin future demand.
More easing of manufacturing and bull beef prices this week as the implications of the increased dairy supply and a nearly full US beef quota is influencing individual processors pricing decisions.
With heavy tarriff penalties for quota breaches processors are putting excess product into alternative markets who unfortunately aren't prepared to pay as much as US buyers.
Demand continues for prime stock and saleyard pricing is high especially in the south where lack of supply is keeping demand strong, similarily so for store stock in both islands.
Health and safety laws have come under the spotlight this week, with farms saved from having to appoint safety officers despite having a poor recent accident record.
By David Hargreaves
Dairy prices look set for another substantial rebound at the latest GlobalDairyTrade auction to be held in the early hours of Wednesday morning.
Trading in the NZX's whole milk powder (WMP) futures suggests that the key WMP prices could rise in the region of as much as 20%, taking the average price comfortably back over the US$2000 per metric tonne mark.
It should be stressed that futures trading patterns have not always been a reliable guide to what's actually going to occur at the physical auction this year, but the futures prices did fairly accurately point to the bounce in GDT prices two weeks ago.
Another significant rebound in prices this week would be a further relief to farmers who have been told by Fonterra to expect just $3.85 per kilogram of milksolids in the current season, compared with an actual price of $8.40 paid out only a year ago.
But even a 20% or so surge in dairy prices in the latest auction would need putting into perspective.
In February 2014 WMP prices averaged over US5000/MT. As recently as March this year average WMP prices (after falling very sharply at the back end of last year) had risen to above US$3200/MT on expectations of a shortage of supply due to a drought in New Zealand. In the event the effects of the drought here were overcome much more rapidly than expected and milk production was actually up in the past season.
Between March and the beginning of this month there were then 10 consecutive falls in prices at the GDT, with the last two drops particularly severe. In the period from early March to early August the average price for all dairy products at the auctions dropped from US$3374/MT to US1815/MT - a 45.8% slump, while the average WMP price did even worse, plunging from US3241/MT to US$1590MT, a 50.9% drop.
The recovery in the prices at the last auction and the expected further recovery this week come following drastic action from Fonterra to reduce the amount of product, particularly WMP, it makes available through the GDT. Fonterra's managing director global ingredients, Kelvin Wickham says Fonterra is now selling approximately 70% of its total product via channels other than GDT "and as a result we do not expect a material impact on inventories”.
Economists with the country's largest rural lender ANZ say that "market intelligence" suggests WMP prices have scope to move back to US$2100-$2200/MT "fairly quickly".
"But to go beyond this requires a slowdown in milk supply, especially from New Zealand," they say.
"A slowdown here seems inevitable, but it is unlikely to show up in any substance until the second half of the season.
"Putting aside weather events such as El Nino, we expect the decline could be toward 5% due to a reduction in cow numbers and the use of less supplementary feed.
"However, as yet we are not seeing a decline in supply from the US or Europe.
"In fact both regions continue to grow milk supply strongly, despite grumbles from farmers about low farm-gate prices that are not even close to those in New Zealand," the economists say.
They believe that for prices to move back above US$2500/MT, an improvement in the fundamentals – "and not just sentiment and bargain hunting" – will be required.
State-owned Landcorp Farming has seen annual operating profits plunge over 83.5% to $4.9 million in the face of sharply declining milk prices and lower returns on lamb.
No dividend will be paid.
The company's total revenues in the year to June slipped 9.2% $224.3 million, while within this, income from farm products dropped 11.7% to $213.5 million.
However, total liabilities increased to $361.8 million from $320.2 million, with bank borrowings rising to $210.7 million from $172.4 million in 2013/14.
Total assets have risen by $26.2 million to $1.77 billion.
The actual result compared with a targeted operating profit of $31.7 million for the year.
Under International Financial Reporting Standards (IFRS) Landcorp’s "total comprehensive income" position was actually an $8.4 million loss, compared with a $115.9 million profit in the previous year.
This included an unrealised loss on the market value of Landcorp’s livestock of $21.6 million (2013/14: $36.7million gain), an unrealised gain on land, improvements and other property of $11.7 million (2013/14: $69.4 million gain) an unrealised loss on other assets of $7.8 million (2013/14 $3.9 million loss) and tax income of $4.4 million (2104/15 $16.4 million tax expense).
Landcorp said that "as has been previously outlined", it doesn't consider net profit after tax and total comprehensive income under NZ IFRS as a meaningful indicator of Landcorp’s operating results "as it incorporates a number of unrealised revaluations on livestock, derivatives and land".
Recently Prime Minister John Key, Finance Minister Bill English and State Owned Enterprises Minister Todd McClay raised concerns about Landcorp's ability to finance dairy conversion commitments in the years ahead.
SOE Minister Todd McClay said he was having an ongoing discussion with the board of Landcorp.
"I want to make sure that with changes some of the pricing around dairy and other things that it doesn't become an issue for them. Landcorp buy and sell farms all the time. It is fair to say a few years ago they purchased a lot more farms and that created some debt," McClay said.
"They are also working through some issues in as far as a contract they entered into in 2004 around land conversions which means that they will have expenditure in the next few years going forward. It's important we get the right balance. It's a sustainable business, we want to make sure the debt doesn't get ahead of them," he said.
Landcorp chief executive Steven Carden said today that record-low dairy prices and tough growing conditions had driven overall financial performance down. However, a "constructive" response to challenging conditions had helped buffer Landcorp from major impact.
“It’s been tough for Landcorp and the entire dairy sector, so our result is solid in that context.
“Things might have proved even more challenging had we not secured a significant volume of supply to Fonterra under their Guaranteed Milk Price scheme at prices that were above the final payout level.”
Lower milk revenue of $88.1 million ($129 million in 2013/14) was partly offset by growth in livestock revenues to $111.3 million ($98.7 million in 2013/14), driven by growth in livestock production and higher beef prices. Lamb production had also increased despite an unusually dry summer.
More than one third of the 430,000 finished new season lambs were supplied on an exclusive fixed price contract to United Kingdom supermarket giant Tesco for its Finest programme of premium meat.
Carden said Landcorp’s drive toward fixed price supply contacts, particularly for higher value niche products, was gaining positive traction.
“For example, our wool revenue increased to $10.7 million for the year ($9.1 million in 2013/14) based on higher demand from overseas. Our partnership with the New Zealand Merino Company in the past 12 months has secured multi-year, fixed-price contracts with brands such as Danish footwear-maker Glerups, and Swanndri.
“Rather than being dictated to by the fluctuations of commodity price cycles, we’re locking in supply deals with partners who can help us maximise the value of what we produce.
“In the medium and long term we intend to expand our portfolio into new, high-value products. Sheep milk, for example, is a premium product opportunity for Asian markets and last week, with our Joint Venture partners SLC group, we opened our first sheep milking facility on the Central Plateau,” he said.
Carden believed that Landcorp had run a conservative balance sheet, with low levels of debt relative to its assets.
“We have purposely taken a long-term outlook on our operating environment, rather than seek riskier, short-term gains.
“We’ve worked hard to remove risk from the business and the diversified nature of our operations and income from dairy, red meat, wool and forestry further reduces risk. Our solid results in very challenging conditions reflect this.
“We’re very comfortable with our level of debt. It has moderately increased over the past few years to fund dairy conversions on the Central Plateau and complete conversions in Canterbury, based on long-term views of dairy payout levels.
“We’ve kept costs flat while continuing to work on initiatives across the five core areas of our strategy. Tight cost controls, precision application of fertiliser and aligning our farming systems to a lower milk price have all yielded savings. A flat cost structure is a pleasing result, given we had an additional five farms come into production during this period. ”
Rabobank NZ, which says loans to dairy farmers comprise more than half its total loan portfolio, is warning "very low" dairy prices for an extended time would see its loan defaults rise and potentially lead to higher loan loss provisions.
The specialist rural lender outlines this in its latest General Disclosure Statement.
"Since 30 June 2015 dairy commodity prices have fallen sharply from already low levels. Farm gate milk prices are now at their lowest levels since 2002. Loans to dairy farmers make up more than 50% of the Bank's overall ($9.314 billion) loan portfolio. Very low prices for an extended period would increase dairy farm loan defaults and the potential for higher loan loss provisions in the Bank's dairy portfolio," Rabobank says.
This comment comes after Fonterra recently cut its farmgate milk price forecast for the current season by $1.40 to $3.85 per kilogram of milksolids. Fonterra is also offering farmers interest free loans with Dairy NZ estimating the average farmer needs a milk price of $5.40, which is $1.55 higher than Fonterra's forecast, to breakeven.
Ironically, Rabobank also says during July it received repayments from a number of individually impaired clients that will "significantly" reduce its impaired asset balance.
*This is an abridged version of this story. The full version was published in our email for paying subscribers on Wednesday morning. See here for more details and how to subscribe.
By John Luxton*
Some of the major players have sought to maintain trade protection rather than to reduce it.
It seems incredible that the US dairy industry has so far convinced the US negotiators that they need to be protected from any increase in New Zealand dairy imports into the US.
The New Zealand dairy industry is the only dairy sector in the TPP which is predominantly export focussed. Around 95% of our production is exported which represents around 25 to 30 percent of New Zealand’s exports by value. The next closest is Australia which exports around 40 percent of their dairy production, but this represents only around 2 percent of Australia’s export earnings. The US dairy sector currently provides much less than 1 percent of the US’s total exports, but by volume the US is still the largest exporter of milk powder, cheese, and dairy proteins in the TPP region. The US dairy industry is four times larger than the New Zealand industry, and exports over 15 percent of its production. The US share of global dairy exports has more than tripled since 2003.
The US dairy sector has stated that access should only be given equivalent to the amount of additional access that they gain from the Japanese and Canadian dairy markets. But this makes no sense given that the US dairy market is significantly larger than the dairy markets of either Japan or Canada, having over 322 million consumers compared to Canada’s 36 million, and Japan’s 126 million. It also consumes nearly 800,000 tonnes of butter and butter related products annually.
The Canadian, Japanese and New Zealand dairy sectors each comprise around 11,500 farms each; however the Canadian and Japanese dairy sectors are heavily protected from imported product with tariffs of up to 300 percent on imports.
Being sheltered from any competition they produce around one third of the milk that New Zealand farms produce and at two to three times the cost.
Dairy consumption is also much lower in these countries because of their high production cost, passed on to their consumers.
There is a parallel in New Zealand. New Zealand used to make cars like Japan does - but at a cost of nearly twice that of Japan. The removal of tariffs on motor vehicles in the 1990s reduced transport costs for all New Zealanders markedly. Free access to our market was given to the Japanese, Canadian and US motor vehicle motor vehicle manufacturers.
To date in TPP Japan has been reported as offering an annual increase in dairy access to New Zealand, equivalent to the production of about three larger New Zealand dairy farms, or .0016 percent of our total production.
Meanwhile in Japan, butter has been rationed and additional emergency imports are regularly being sought. Effectively 11,000 dairy producers are holding 126 million Japanese citizens to ransom in terms of their dairy consumption options.
Canada also appears not to have made a decent offer on dairy. Whilst most sectors of the Canadian agricultural sector want TPP to be successful in order to allow an expansion of cereal, canola and pork exports, the Canadian government still seems to be focussed upon protecting inefficient parts of their farming sector. In this way Canada’s 11,000 dairy farmers are holding 36 million Canadians citizens to ransom both in terms of the dairy products they can access and reducing the export prospects of their more efficient producers.
The US, Canadian, and Japanese trade negotiators need to deliver on the original intent of a comprehensive removal of restrictions on all goods traded amongst the TPP signatories – not just on the exports that matter to them.
The best outcome for dairy would be to enter into a comprehensive approach to opening up these currently closed markets by opening up progressively over 5 to 10 years to allow total access. Then local dairy sectors could then adjust to the changing market.
A comprehensive freeing up of dairy trade in the TPP agreement would also markedly increase the amount of international dairy market open to trade, from currently about 8 percent of all international milk production to around 20 percent. This would markedly reduce the current volatility in world dairy prices resulting from the current thinly traded market buffeted by small surpluses or deficits in global dairy demand.
If Japan and Canada cannot agree with the need for a comprehensive TPP agreement providing duty-free access on all goods then they should leave the talks and come back when they are prepared to honour the promises they made on entering the talks in 2013 and 2012.
John Luxton is currently the Chairman of DairyNZ. He is a former National Party politician and minister. He is also co-chair of the Waikato River Authority, a Crown/iwi co-governance organisation established through Treaty of Waitangi settlement legislation to clean-up the Waikato River.
After the downfall of Solid Energy, we have seen increased scrutiny of Landcorp – another State Owned Enterprise (SOE) that has recently taken on more debt.
This debt has been taken on to fund large scale conversions of pine to pasture.
We commented earlier this week on the environmental and treaty implications of these conversions and now other Waikato farmers have joined the calls for the conversions to be halted. In light of the drop in milk prices Landcorp’s plans look increasingly vulnerable, and that may force the SOE to sell some of its land.
But the real question is why does Landcorp exist at all?
Why do we have Landcorp?
Landcorp was set up in the 1980s to manage the commercial interests of the Department of Lands and Survey. In these early days the task was mostly to run the high country leasehold farms that the government owned. One of the original rationale for keeping the land in government hands was that it could be used for Treaty settlements. In the mean time, Landcorp’s job was to use the land productively.
However, over the years the activities of Landcorp have grown and grown into a multi-headed monster.
In addition to this original role it now converts land from pine to pasture, leases land for dairy, sheep, deer and beef farming and develops rural land for ‘higher value uses’.
These are all activities that the private sector is adept at – there is no need for the government to be involved.
According to their website:
Our purpose is clear – to transform New Zealand farming. We understand the privileged nature of what we do and where we farm. Landcorp has long been New Zealand’s largest farmer – but we must also be its best.
We have extraordinary assets in our people, land and resources. We will continue to unlock and develop their potential while demonstrating that improvements in profitability can go hand in hand with sound environmental practices.
Landcorp is highly experienced in large scale farming operations and we’ll continue to utilise our skills and brand to target premium, niche markets around the world. We’ll stay lean and agile with a clear vision and robust strategies – because we know that what we have here is precious, valued and cannot be replicated.
This is mostly waffle – there is nothing here that the private sector can’t and shouldn’t do. In fact as we pointed out in our earlier blog, by the government owning this business it actually acts against them getting tough on environmental issues because it impacts on their own bottom line.
Where is the market failure?
Usually governments get involved with an industry or business for a precise reason. This is usually based on a ‘failure’ in the market – there is some reason we can’t leave it to private businesses to deliver. Healthcare is a good example – often people don’t make rational decisions about what healthcare they need. As we see in the US private model people tend to underinvest in prevention and pay through the nose for excessive treatments they don’t need, just because a doctor tells them they should.
So how does this idea of market failure apply to Landcorp? Short answer is, it doesn’t.
Farming is one of our most competitive industries, one where we can with a lot of confidence say the ‘market works’. Why then is Landcorp – a government-owned Quango out there buying, selling and leasing farms and doing stuff the market can do? It’s actually worse than that – to the extent Landcorp has an impact in the market for farms it’s crowding out the private sector, crowding out the activity of arguably our most entrepreneurial sector. It just doesn’t make sense – the government needs to get rid of it.
I can remember ten years ago asking senior Landcorp executives what on earth the rationale for their empire was. They told me it was a proven exemplar of best farming practice and provided much valued new knowledge for the farming industry. I thought that was a stretch at the time, and sounded more like someone trying to justify their job. But there can be little doubt that Landcorp’s expansion over the years has done little but stolen opportunity from the private sector and the justification for that is pretty well wafer thin. Now it threatens the Crown’s balance sheet and our ability to legislate on environmental bottom lines into the bargain.
How can we get out of it?
With the last of the Treaty settlements now being completed, it is time for Government to work out an exit strategy for Landcorp.
As Fran O’Sullivan points out there are several options, such as doing a partial privatization deal with iwi or the NZ Super Fund. The Government could also transition its exit via the mixed ownership model that it uses on the electricity companies and Air New Zealand.
But whatever the route it needs to stop unnecessary interference in the market.
We have enough instances of market dysfunction to justify government regulatory or ownership interference without doing it for no more than legacy reasons.
That a National government is asleep to economically inefficient nationalisation like this seems particularly lazy – especially when it has conducted some quite questionable part privatisations of businesses where it looks like the market isn’t working properly (such as the electricity generators). What is it with this farming monolith for National? Smacks of some pretty weird double standards.