By Keith Woodford*
In the last two weeks we have seen increasing signs of further disruption and volatility in dairy. First, there was good news with Fonterra announcing that they had turned the corner In relation to enhanced corporate profitability. But then, only two days later, there was another decline on the (GDT Global Dairy Trade) auction – this time of 7.9 percent overall and 11 percent for whole-milk powder.
In the meantime, The a2 Milk Company announced that they were almost doubling their previous estimate of profitability for the coming year, triggering another increase in the share price. Since the start of November through to 24 November the price rose 60 percent on large volumes.
Away from the headlines, there was news from China Customs that Chinese infant formula imports from January to September had risen 33 percent by volume and 44 percent by value compared to last year. However, buried in the details was that New Zealand’s market share had further declined down to 8.4 percent from 9.4 percent just two months previously. (Several years back it was up at 20 percent.) New Zealand’s market share of China’s imported UHT has also been declining as the Europeans take over.
As for European production, despite suggestions from Fonterra to the contrary, there are no signs yet of any year-on-year decline. Indeed the month-on-month production comparisons with last year show ongoing increases.
Ireland and the Netherlands are the main drivers of these increases, with other Northern Europeans following along behind. So what do those Irish and Dutch farmers know that the rest of us don’t?
Meanwhile, over in America, production is also continuing to increase. Fortunately, the Americans are also continuing to increase their cheese and butter consumption, and this is soaking up most of the increase.
First of all, let’s look at the Fonterra’s recent announcements about increasing profits. As so often, there is an element of spin. And why did these numbers come out right now? Well, several of my mates have reminded me that it did coincide precisely with election time at Fonterra.
There is no doubt that Fonterra is getting better margins on its value add and consumer service. This is very good news. However, with auction prices low, and the exchange rate coming down, this is to be expected. Fonterra also expects more than $300 million in savings from the more than 800 staff they have recently made redundant. The puzzle is how Fonterra got into such a situation so as to have more than 800 staff surplus to requirements.
Unfortunately Fonterra’s debt servicing is also going up because of last year’s additional borrowing. Thank goodness interest rates are so low! The overall expected improvement in profit from all of these things is some 5 cents per share, or about $80 million in total.
Fonterra is saying that they now expect to see substantial price increases in the first half of 2016. They could be correct. But the evidence supporting that looks somewhat shaky.
In comparison to Fonterra, Synlait keeps its farmers much better informed as to where things are at. Their latest (early November) newsletter to suppliers says their current estimate for the season remains at $5 per kg milksolids. However, they have also told their farmers that the prices to the end of October (before the last two auctions) only support a price of $3.60. So there is a lot more ground to make up.
Personally, I am now of the view that both Fonterra’s $4.60 and Synlait’s $5 are definitely looking optimistic. However, I qualify that by saying that I have always believed that any estimate prior to Christmas needs at least an 80c leeway either up or down. If whole milk powder prices were to suddenly rise to $3000 per tonne, then the $4.60 and even $5 could still be achievable. But will that $3000 per tonne actually happen?
My farmer friends are now starting to ruminate on the prospect of poor payouts throughout all of calendar 2016. It is indeed an unpleasant possibility.
So what is driving those Irish and Dutch farmers to keep producing more milk despite declining prices?
In the case of the Irish, it looks like they got carried away by the rhetoric from last year and have undertaken some rash expansion. In the case of the Dutch, it is more a case of they have done their sums and said that, despite the low prices, the best way to minimise any short term losses is to actually produce more. In economic terms, marginal revenue still exceeds marginal cost, even if in some cases the fixed costs are not being met.
As for the Americans, they are still getting a payout of about $7 per kg milksolids in New Zealand terms. And once again, with feed costs still modest, marginal revenue exceeds marginal cost, and so they keep producing at maximum level. It is only when some less efficient farmers move to a long term perspective and start shutting down that volumes will decline.
So hopefully both European and American production will soon turn the corner and decline, but so far there are no signs of it.
The two big winners for infant formula at the moment are a2 Platinum coming out of Synlait (on contract to The a2 Milk Company), and Bellamy’s organic milk formula out of Australia. Both are successfully leveraging off their buoyant Australian sales, with Chinese mums saying whatever the Australian mums want is what they too want. The challenge for both companies is now to ramp up their supply as fast as possible.
The a2 Milk Company currently has contracted supply of about 100 million litres per annum from Synlait. But it needs a lot more. In my opinion, they need to increase the A2 premium to Synlait’s farmers if they are to winkle out more supply.
I take some satisfaction from having first introduced the CEOs of Synlait and The a2 Milk Company to each other some years back. At that time I thought they had potential to be ideal partners, although in practice it seems the relationship may have been a little fractious at times. Currently, The a2 Milk Company has said that it is also looking at Australian production of a2 Platinum to build the supply they now need.
In general, it is much easier for large farmers rather than small farmers to put together A2 herds. For many New Zealand farmers, the percentage of what we call A2A2 cows (i.e. those carrying double copies of the A2 gene variant) will be between 40 and 50 percent. For farmers with multiple herds, it is relatively easy to test and then re-organise the herds so as to supply a pure A2 milk product. (For those who are wondering why I sometimes use a small ‘a2’ and sometimes a capital ‘A2’, it is to distinguish between the product and the brand.)
Some months ago, I wrote about Synlait’s Akarola infant formula which sells online in China at 99RMB. I said it t would be a disruptive strategy, and it has been.
It is still too early to say whether Synlait and its Chinese partner New Hope will make substantial profits from Akarola, which sells much cheaper than other brands. It will all depend on whether New Hope can convince Chinese mums that it is a quality product, despite not being sold elsewhere in the world. But what is very evident from perusing the Chinese online sites, is that nearly all of the other infant formula marketers have now responded by also lowering their online prices.
At the recent New Zealand China Business Summit, Fonterra’s Theo Spierings was asked his opinion of the Akarola strategy. He made no effort to hide his negativity, referring to it as destructive, or words to that effect. That, of course, is a natural response when someone undercuts the prevailing price.
The reality is that online selling is so much more efficient logistically than the traditional multi-layered channels through baby shops and supermarkets, that it is indeed disruptive. Just like Henry Ford with his Model T, once Henry had gone to the market with a new assembly line technology, everyone else had to follow. As in most games, there are winners and losers.
So what has been happening this year is that the landed prices in China of infant formula have been going up, but the final prices to consumers have been going down. Those sticking to the old logistics methods are getting squeezed.
The big dairy unknown for the next few months is the effect of the El Niño. This El Niño is real, and it is big. But every El Niño is different. Until recently, the anticyclones were forming well south in the Tasman Sea, giving a southerly aspect to the wind flows. With the winds now turning more westerly we may well get a big drought in eastern areas - but then again we may not. Weather patterns can be fickle. The international dairy industry is watching with great interest to see what happens down here in New Zealand over the next three months.
Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. Disclosure of interest: Keith’s clients include Calder Stewart who build free-stall barns. His archived writings are available at http://keithwoodford.wordpress.com
By Allan Barber*
The two biggest meat processors had contrasting experiences during the 2015 season to judge by their annual results and accompanying comments.
There is no doubt Silver Fern Farms found life easier than Alliance, with respect to the year in question.
SFF must also have heaved an enormous sigh of relief after its improvement from the previous three years.
The bare facts of the differing results are NPAT of $24.9 million and dramatically reduced debt for SFF and $4.6 million NPAT for Alliance accompanied by a marginal reduction in equity ratio.
Alliance’s performance was slightly worse than 2014, disappointing as chairman Murray Taggart agreed, whereas SFF’s result was a massive improvement on the previous year. Neither result represented a satisfactory return on assets, but signs for the future are positive.
SFF’s recovery from several torrid years, combined with the JV agreement with Shanghai Maling, lifted morale considerably, as well as removing an enormous degree of stress from the shoulders of board, management and banks. It also clarified the position of cooperative shareholders in their capacity as both suppliers and shareholders. Although there remains a minority not in favour of the rescue package, the vote at the Special General Meeting was very conclusive.
Alliance, with a stronger balance sheet and therefore without such an acute need for remedial action, has taken a completely different course of action. There is no confusion at all about its continuation as a 100% farmer owned cooperative which it is now able to promote as a key point of difference. The new company strategy is clearly focused on delivering value to shareholders.
At the release of Alliance’s latest annual result Taggart made a point of emphasising the company’s commitment to accepting lamb and sheep from farmer suppliers, even in weakening market conditions, in order to reduce exposure to volatile markets and to limit the impact of dry conditions.
He said “The alternative of reducing our processing would not have been in line with our co-operative principles and would have adversely impacted our farmer-shareholders. This is the unique difference in being a 100% New Zealand farmer owned cooperative; we look at things through the lens of what’s important to our farmer-shareholders.”
There are other reasons for the differing performances of the two companies, although it must be remembered both actually made a profit. This has not always been the case.
The main reason is the advantage SFF gained from its spread of plants across different species in both North and South Islands. Cattle made a much greater contribution to profit than sheepmeat as a result of the heavy cow kill and the demand from the USA which pushed beef prices to levels not seen before.
The lamb kill kept going far longer than usual and Alliance ended up processing a disproportionate number of these towards the end of the season when other companies, notably SFF, had basically stopped killing. Consequently Alliance ended up with a large inventory carryover at year end which didn’t help the annual result, as SFF had discovered in the 2012 and 2013 years. However in spite of a weaker trading environment, Alliance has successfully sold the excess inventory and stock is now down to normal levels.
Other negative impacts on profit were difficult weather conditions in key catchment areas for Alliance, like North Canterbury, and the need to cut lambs in less than ideal configurations because of high numbers later in the season. However the company believes it is very well placed strategically and has put a programme in place which will deliver benefits to its supplier shareholders, although the full results of the programme will take two years to take full effect.
Interestingly both companies ended the 2015 financial year with very similar equity ratios: SFF at 59.4% and Alliance at 58% which suggest a solid foundation for future performance. Assuming Shanghai Maling receives OIO approval to acquire 50% of SFF, this ratio will improve dramatically with term debt predicted to disappear. However the new board will have decisions to make about expenditure on plant rationalisation and upgrades which will require a certain amount of debt as part of an efficient balance sheet.
In discussion with Dean Hamilton about the condition of SFF’s plants, he accepts the company has some surplus capacity, although not as much as some competitors like to think, while he asserts plant maintenance has been kept up to date. It will be interesting to observe how the joint board decides to address these issues when the JV partner’s investment becomes available and the ownership restructure occurs.
Meanwhile Alliance is satisfied with the condition of its plants having booked $4.3 million of restructuring costs in the last two financial years. Taggart is confident Alliance is at the most efficient end of the cost curve and will continue to improve as it implements its strategy.
In spite of MIE’s failure to bring about a merger of the two cooperatives, it seems certain both companies will achieve the desired efficiencies under separate ownership.
Because of the differentiated nature of meat processing and marketing, I am convinced the outcome will be good for the meat industry, because it will require companies to become efficient at what they do best, or they will fail. In this way farmers will benefit from improved performance and pricing, while being able to continue choosing where to send their livestock.
The meat industry has long been viewed as agriculture’s ugly duckling, even when it has had good years, but I am optimistic it now has a good chance of achieving its rightful position as a viable alternative to other, more fashionable, forms of land use. Two profitable South Island cooperatives will be a good place to start.
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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 email@example.com or read his blog here ». This article was first published in Farmers Weekly and is here with permission.
By Bernard Hickey
Environment and Housing Minister Nick Smith has finally tabled a massive set of reforms to the Resource Management Act (RMA) for consideration by Parliament after doing a deal to support the reforms through to the select committee stage with the Maori Party.
The Government had hoped to reform the key sections 6 and 7 of the RMA to introduce economic development and housing affordability as first principles for the Act, rather than environmental protection, but had to abandon that after New Zealand First won the Northland byelection earlier this year.
National's support partners
David Seymour, Peter Dunne and the Maori Party had opposed the changes to sections 6 and 7 of the Act, which lay out its first principles, arguing it watered down protections for the environment. (Corrected to make clear Seymour supported the 6/7 changes)
After the loss of the Northland seat, National needed either the support of Dunne or the Maori Party to progress legislation. Dunne remained opposed to some of the 40 measures included in the reforms, but the Maori Party had said it would support the reforms through to select committee stage after securing commitments on consulting Iwi and allowing Iwi farmers to access ground water for stock, Smith said.
The changes include the introduction of new 10 day fast-track consents for simple issues, fixed fees for standard consents and the removal of the need for consents for some areas covered by other acts. It also introduces standard planning templates "so we don't have every council reinventing the wheel and having dozens of different ways of measuring the height of a building," Smith said.
"The Bill contains dozens of provisions that will improve the process of resource management decisions. There will be millions of dollars in savings from simpler, plain language public notices that enable the detailed information on plans and consents to be accessed on the web," Smith said.
'Iwi Participation Agreement'
The Maori Party secured the inclusion of new "Iwi Participation Agreements, which would involve Iwi early in the resource consent process. It also ensured corporate farmers, including Iwi and trusts, will be able to secure water for stock without obtaining resource consents in the same way as individual farmers currently do.
The 180-page Resource Legislation Amendment Bill comprises 40 changes contained in 235 clauses and eight schedules. It makes changes to the Resource Management Act 1991, the Reserves Act 1977, the Public Works Act 1981, the Conservation Act 1987, the Environmental Protection Authority Act 2011, and the Exclusive Economic Zone and Continental Shelf (Environmental Effects) Act 2012.
Smith said the Bill would simplify the consenting process.
"It narrows the parties that must be consulted to those directly affected – meaning a homeowner extending a deck only has to consult the affected neighbour. Councils will have discretion to not require resource consent for minor issues," Smith said.
The new 10-day fast track would be available for simple issues, while Councils would be required to have fixed fees for standard consents.
"Consents will no longer be required for activities that are already properly regulated by other Acts. These measures will reduce the number of consents required each year by thousands," he said.
Maori Party Co-Leader Marama Fox said retaining sections 6 and 7 had been a priority and it had opposed proposals for an alternative consenting authority.
"Iwi Participation Agreements will require councils to engage with iwi during their planning processes to ensure they are involved in resource management decisions at the front end," Fox said.
Maori did however agree to include managing for natural hazards such as earthquakes and sea level rise in the sections 6 and 7 of the act.
Smith published a questions and answers document detailing the changes.
- Amending the standard planning process to enable limited notificaiton of plan changes, and requiring the Minister's approval to go beyond the two-year timeframe for decisions on plan changes,
- Creating a new streamlined planning process which would allow Councils to apply to the Minister for an alternative planning process,
- Allowing Councils to limit notification to only those people who are directly affected by a new resource consent,
- Permitting boundary activities where they have been agreed by the relevant neighbours,
- Introducing a 10 working day time limit for simple applications,
- Creating a three options for Council plans, including the existing track that now has tighter timelines, a new collaborative track, and a streamlined track.
- Allowing regulations to be set by the Minister for specified land uses,
- Allowing the Environment Court to to require people to go to alternative dispute resolution and judicial conferences first,
- Allowing Councils to compulsorily acquire land that has been rendered incapable of use by planning provisions,
- Changing the Public Works Act to allow the Government to pay a 'solatium' or compensation payment for disruption and interference when a landowner is selling their home of up to NZ$50,000, rather than the current NZ$2,000, which was set in 1975,
- Removing the need for all public notices to be published in newspapers, instead limiting notices in newspapers to summaries with the full notices online,
- Preventing just any group from registering as a Heritage Protection Authority to protect places on private land.
Federated Farmers said the proposed reforms did not go far enough.
“As it stands in this Bill farmers will continue to face restrictions on what they can do on farmland which is classified as an ‘outstanding natural landscape’. This unfairly limits farmers’ ability to plant trees, add new buildings and install new fences, which ironically is what the Bill wants farmers to do to keep stock away from lakes and rivers,” said Federated Farmers' Environment spokesman Chris Allen.
“Federated Farmers would have liked to see greater consideration of economic benefits and property rights,” he said.
Green Environment spokeswoman Eugenie Sage said the proposed changes appeared to benefit seabed miners and property developers.
“The Bill appears to significantly increase the Minister’s powers at the expense of local councils and to further politicise environmental decision making by having the Minister, rather than the Environmental Protection Agency, appoint hearing panels for developments in New Zealand’s Exclusive Economic Zone,” Sage said.
“The Bill risks having a chilling effect on councils’ ability to regulate in the community’s interest. For example, under proposed changes, councils could be reluctant to protect native plants and trees on private land as the Environment Court could require the council to purchase affected land if protections were deemed to put an ‘unfair and unreasonable burden’ on landholders," she said.
“The proposed RMA changes must not erode protection of the places we hold most dear; our beaches, rivers, and natural areas. They must not promote ugly urban sprawl at the expense of liveable towns and cities well connected to public transport."
Property Institute Chief Executive Ashley Church supported the reforms, but said they would do little to accelerate the construction of new dwellings.
“These changes will be great for people wanting to build a deck or move a fence – but they’re not going to lead to a big jump in house building in Auckland," Church said, adding he would have liked to have seen more directions to Councils to open up land for development, fewer rules around sub-divisions and the adoption of targeted rate funding for infrastrucrture.
Property Council Chief Executive Connal Townsend said he was extremely pleased with the proposed reforms,
“We strongly support national templates to streamline and rationalise plan making processes. This will undoubtedly improve consistency in other areas, such as clarifying requirements which will enable greater compliance and save time and money," Townsend said, adding the bill's optional streamlined planning and consent provisions had a proven track record with the Special Housing Areas Act.
“These are exactly the sorts of measures we have been calling for to directly address Auckland’s housing crisis and regional growth. Issues such as improved resource management have been stalled by political paralysis at great cost to communities and the country, he said.
(Updated with more details, reaction, correction in third paragraph)
By Peter Tate*
There are some companies that seek publicity about sales contracts they have made. That’s fine but often the fanfare is over a very small volume of product. This distorts the view growers have of marketing to the point that they think these companies are the only ones doing anything to market the NZ wool clip.
The real exporters, those with the long track records, continue to stay out of the limelight. This is due to what is called commercial sensitivity, it is an extremely competitive business. More cut throat than meat marketing, hence the old Yorkshire phrase “meaner than a mill boss”. So the firms who are selling and shipping 90% of the NZ clip remain tight lipped about their daily deals.
Another false claim is that the wool trade is dysfunctional.
Again this is only an impression the press creates by stories from dreamers claiming to be the new wool messiah.
The wool trade in NZ runs on the daily intermeshing of many entities resulting in regular sales, deliveries to specification and on time with everybody being paid in full on prompt terms. That’s our job and we find doing it well rewarding enough.
While there are companies doing great work in this area for small amounts it still leaves large volumes of product to be sold. The greatest percentage of NZs primary production is exported as an ingredient for transformation into a product offshore. The idea of adding value in NZ was abandoned 30 years ago. In the wool industry Brokers, Merchants and Exporters are doing the hard graft in finding a home for 90% of New Zealand’s Wool Clip including inferior hard to sell wool.
There has been a lot of media coverage lately about wool company’s, corporate and co-operative, creating themselves, using woolgrowers’ seed money. They tend to pay substantial amounts to PR companies creating stories for the media, usually taking only small amounts of truth and padding it out with all the mind-altering marketing jargon available today.These Companies promise everything the farmer wants to hear, but they deliver few, if any, positive results.
Recently a certain company has had numerous articles in the media about approx. 100 tons of wool contracted to a European manufacturer. This really says more about their PR expertise than their wool trading abilities. Selling 100 tons of wool takes approximately 30 minutes at any given wool auction.
Our hard working Exporters do these volume transactions on a daily basis with no fanfare. While not being critical of this contract I feel we need some perspective. There is nothing new or unusual in these contracts purported to be so significant.
Over the last 25 years we have witnessed depressed wool prices largely caused by farmer owned organisation’s using their floor price mechanism to hold wool prices at unreasonable levels at a time of oversupply which blurred market signals and promoted over production. Broker’s, Merchants and Exporters managed to sell the NZ wool clip into very depressed world wool markets. Over this time all of the wool Industry struggled (growers included), and many went out of business.
When ownership of wool is transferred from the grower to the Exporter, the Exporter incurs all the costs. The Grower has guaranteed payment 11 days from Auction. The exporters costs include processing, Interest, storage, transport, marketing, scouring and/or dumping, testing and shipping. They also take the risk of holding this wool in a volatile market.
The companies I refer to above are passing these costs back to the farmer.They are offering gross prices but after costs and much delayed prompt the net price is much less than selling through their traditional means.
The good news is that wool prices have increased in the last two years on the back of a significant drop in the world sheep population and good old supply and demand.
The increased demand is also being driven by consumers heightened awareness of environmental concerns, and in my opinion, The Campaign for Wool, initiated by HRH Princeof Wales and his concern for the plight of the world’s Sheep farmers. Over the last 6 years of the campaign Brokers, Merchants, Exporters and growers have contributed thousands of unpaid hours to this campaign and also significant amounts of money.
There has been a real revival in all things wool with stronger wools being sort after for interior furnishings i.e. wall covering, upholstery, curtains, insulation, bedding etc
There is not going to be a sudden increase in wool supply for the foreseeable future. The price will go up and down as all markets do but also being able to sell to any market for as much as the winning buyer can pay is the best position to be in.
The assertion that prices have risen due to taking wool out of the auction is garbage.
It is the freedom of competition in the open auction forum that ensures best values are obtained. Unlike the back door sales to a single bidder for the lots of wool that don’t fit contract specifications.
In fact the burden of accommodating that volume of wool reduced the competitiveness of one exporter at auction last season. Many are the examples of growers who even after funding these entities receive less than the market price and pay high cents-per-kilo charges.
The dry spreads to the south of Canterbury, and average pasture growth rates in the dry east coast of the South Island still lag well behind the average and reinforce the chances of a serious summer drought.
Farms with surplus feed have rapidly made them into baleage and summer forage crops are just emerging from the ground and in need of irrigated water or rain.
But many areas of the North Island have had a great spring with most regions achieving pasture growth rates ahead of the norm, allowing plentiful surplus pasture to be harvested and good establishment of summer forage crops.
Time is running out for an improvement in this year’s payout and last week’s global dairy trade auction result severely dented that prospect with its 7.9% price fall.
This week’s Fonterra AGM may prove lively with many contentious issues, but most ears will be waiting to see if the payout prediction can be held at $4.60/kg/ms given the poor recent auction results.
The director results have been released with the chairman John Wilson and existing director Nicola Shadbolt re-elected, but Blue Read a casualty and will be replaced by Ashley Waugh.
Analysts are now predicting the dairy turn around may not start until 2016 when the global market realises the implications of New Zealand’s lower export volumes and will need to compete to secure supply.
The dairy future prices appear to have bottomed and are moving upwards again, and this is the first sign these 2016 predictions are not far off the mark.
The rural real estate market has quickly followed the weaker product returns with the dairy land price index falling by 18.6%, and reports that one bank is canvassing farms for sharemilking positions reveals the tough financial plight for many in the sector.
Lamb schedules are still looking for the bottom as weak frozen demand curtails sustainable pricing and dashes any hopes for a better price season.
As early draft sheets return, farmers are getting increasingly frustrated at good quality lambs making well under $100, which was the level processors suggested was likely early season.
Weaning has started on the early flocks with export, saleyard and local trade prices all at least $10/head behind last year, and it appears more falls are still to come.
The south east South Island has got dry in line with climate expectations and dryland strikes of summer forages are patchy where soil moisture is limiting, but eastern areas of the North Island report a great spring with well timed heavy rains keeping feed levels adequate.
Few store lambs have been traded as yet, but a week of dry winds could see a rapid destock in at risk areas, and prices could soon be under more pressure.
An earlier than normal Easter cannot come soon enough for the revival of the chilled demand, but with price and volume negotiations are underway, some cautiousness is evident on the back of the frozen products demise, and strong competition from Australian exporters.
Irrigation developers for Stage 2 of the Central Plains Water scheme in Canterbury report they have had a good early farmer uptake at 72% (looking for 80%) and hope to have half the area with water by 2017 and the balance the next year.
Certainly a dry year like it appears the area is heading into, will focus farmers decision making on this huge investment and most will either commit or sell, and leave others to reap the rewards of this long term opportunity.
A small South Island wool auction saw a good clearance on the back of a weaker kiwi dollar and all micron indicators lifted significantly on the last southern sale.
More wool will now be offered, as on the mother and post weaning shearing will now dominate and dry weather should ensure colour quality will be maintained and keep prices 0.70c-$1/kg clean above last year.
More falls in beef schedules this week, but reports that in the US prices are stabilising, and in Australia kill tallies have dried up and some plants have closed early or reduced shifts, will be good news for NZ exporters.
Earlier exporter optimism of Chinese demand for beef has wilted, with extra volumes filtering through the ‘grey channels’ via Hong Kong.
Saleyard prime animals have also fallen quickly in price on the back of export and local trade falls, and are now at prices similar to last year.
Good news on the TB front with deer and cattle herd infection rates reduced to just 25 in the South Island, and complete eradication of this insidious disease now a realistic target.
AFFCO has been ruled by the Employment court to have imposed an illegal lockout for union supported employees, a decision that will have far reaching implications in future labour disputes.
Venison schedules are now adjusting down in typical summer fashion, but exporters report their markets are in better shape than beef and lamb and prices are $30/hd better than last year.
Industry planners will be hoping this is the catalyst for reinvestment in females and a return to sustainable growth after many years where deer numbers have fallen and processing efficency was at risk.
Top velvet heads will soon be selected for the series of velvet competitions and breeders will see the spectacular advancement of velvet weights and style, that has made over the last few years.
Climate Change Issues Minister Tim Groser says the Government has begun a review of New Zealand's Emissions Trading Scheme (ETS), but the full inclusion of agriculture "remains off the table at present."
Groser says the Government has decided not to include agriculture in the scope of the review.
"The Government has previously said it would only bring biological emissions from agriculture fully into the ETS if there were economically viable and practical technologies to reduce these emissions. We are putting considerable investment in research and development to find new options to reduce agricultural emissions, and we will continue to work with the agricultural sector to enable and incentivise the sector to adopt new mitigation options as they become available," Groser says.
"However, the full inclusion of agriculture in the ETS remains off the table at present."
The ETS review will assess the scheme's operation and effectiveness to 2020 and beyond, adds Groser.
“In July we set an ambitious target of reducing greenhouse gas emissions after 2020,” Groser says. “This review will look at how the NZ ETS may have to evolve to support New Zealand in meeting this new target."
“We also want to ensure the NZ ETS can continue to support New Zealand’s transition to a low emissions economy, and that we are prepared for the costs and opportunities associated with this transition."
He says the review will focus on three areas: 1) What to do about some transition measures that were introduced to moderate the initial impacts of the ETS. 2) How the ETS needs to evolve to meet future targets. And; 3) Operational and technical improvements.
The REINZ Dairy Farm Price Index fell 18.6% in the three months to October versus the same period of last year.
The Index adjusts for differences in farm size and location to show the trend across the country, but the number of dairy farms sold and their median price per hectare were also down.
According to the REINZ, 18 dairy farms were sold in the three months to October, compared with 23 in the same period of last year and 37 in the three months to October 2013.
The median sale price per hectare was $31,552 in the three months to October, down $11,747, or 27%, from $43,299 in the three months to October last year.
Other types of farming properties have generally fared better, with the REINZ All Farm Price Index down 5.9% in the three months to October compared to the same period of 2014.
Sales of horticultural properties were strong, with 68 selling in the three months to October at a median price of $171,482 per hectare, compared to 59 sales at a median price of $179,894 per hectare in the same three month period of last year.
And 153 grazing properties were sold at a median price of $19,253 per hectare in the three months to October, compared to 166 at a median price of $14,290 per hectare in the three months to October last year.
There was a sizable increase in sales of arable properties, with 35 selling in the three months to October compared to 29 in the same period last year, while the median sale price per hectare dropped sharply, almost halving from $68,514 in the three months to October last year to $36,110 in the three months to October this year.
REINZ rural spokesman Brian Peacocke said a notable feature of the market had been the increasing number of farms being marketed for sale in the greater Waikato region and speculation surrounding the values of such properties.
"That speculation gained some answers in the latter part of the month with good farms being offered by genuine vendors prepared to meet the market , selling at values fully firm on last season," he said.
The REINZ said other features of the rural market included:
- Insufficient supply of properties to meet demand in Northland, where an easing of prices is anticipated.
- Strong demand in the Waikato with some exceptional prices being achieved for quality grazing/finishing/dairy support properties.
- A slow market in Taranaki affected by a cold, wet spring.
- Extraordinary strength in the Bay of Plenty kiwifruit market.
- Steady market conditions in the lower North Island.
- Mixed interest in dairy farms in Canterbury and inconsistent sales activity.
- A slower market in Southland with early sales indicating a drop in value of around 7%.
To read REINZ's full market report all farm types and all regions, click on the following link:
By David Hargreaves
Fonterra's forecast milk price of $4.60 per kilogram of milk solids for its farmers is looking under renewed pressure after another sharp fall in global dairy prices overnight.
The third consecutive fall in prices saw the GlobalDairyTrade Index drop another 7.9%. It's now fallen a cumulative 17.3% in the past three auctions after four consecutive auction gains had seen it rise 62.8% from the lows reached on August 4. The index is now just 34.6% above those lows.
But the news is rather worse in the key Whole Milk Powder prices, which slumped 11% overnight to an average $2148 per metric tonne. These prices are now down 23.9% since October 6. A large part of the 77.6% gain in WMP prices from the lows of August 4 has been eroded, with prices as of last night now just 35.1% above the August lows.
Fonterra was sticking with its $4.60 milk price forecast when it gave a market update earlier this week, which included lifting the potential dividend payout by 5c. Fonterra will have known at that stage that this week's auction results would not be favourable, as NZX Dairy Futures trading had pointed to further falls. But chairman John Wilson said the co-operative was still looking for a move up of dairy prices in the first half of 2016 - and the $4.60 forecast was based on that continued expectation.
AgriHQ dairy analyst Susan Kilsby said the NZX Dairy Futures market shows very little upside for dairy commodities through to the end of the 2015-16 dairy season, with WMP prices now only expected to reach US$2400/t by July 2016, after having fallen US$400/t in the past fortnight.
“The current outlook for the dairy markets means Fonterra’s milk price forecast of $4.60/kgMS is now under considerable pressure,” Kilsby said.
“At present buyers are generally well stocked and have ample supply options for dairy commodities. Therefore we currently see very little urgency from buyers. The drop in milk output from NZ in recent months has been matched threefold by the increase in production from Europe. Until global milk supplies drop further, prices are expected to remain soft.”
ANZ senior economist Mark Smith said the low run of dairy prices "looks set to consign the dairy sector to another dismal season and the key for Fonterra’s current $4.60/kg MS milk price forecast will be how long the current downtrend persists". ANZ has been forecasting a milk price for the season of $4.25-$4.50.
Westpac senior economist Anne Boniface noted that the Fonterra forecast was still contingent on some improvement in prices over the remainder of the season.
"This is something we continue to regard as likely – despite the direction of recent price moves. New Zealand dairy farmers are yet to feel the full brunt of an El Niño weather pattern but milk production (for Fonterra farmers at least) is already running 4% behind last season thanks largely to early culling of stock and reduced spending on supplementary feed. Fonterra continues to expect it will be down 5% over the full season.
"Reflecting this, and a change in mix of product offerings (amongst other things), Fonterra has continued to tweak its forecast of WMP offered on the GDT platform and expect to offer 5% less via this platform over the next 12 months than it was projecting a fortnight ago. While this appeared to do little to support prices in last night’s auction, if El Niño does hit milk production, we suspect it will lead to a bounce in prices, albeit a temporary one."
Westpac economists are currently picking a $4.50 milk price for the current season, which is the same as the BNZ.
ASB economists have tended to be about the most upbeat among the large bank economists and kept their milk price forecasts higher than others at a time when global prices were really plummeting earlier in the year. However, they've now dropped their milk price forecast as well, from $5 to $4.60.
"Although we expect prices to eventually end the season higher, these weak auctions have added up," ASB rural economist Nathan Penny said. He noted that the season was nearing the half way point in terms of auction volumes sold, with a little over 40% of WMP sold so far.
"As a result, we trim our 2015/16 milk price forecast by 40 cents to $4.60/kg. However, note our 2016/17 milk price forecast remains unchanged [at $6.50]. In other words, we continue to expect dairy prices to recover over 2016 and dairy’s overall prospects remain positive.
"This auction result reinforces our view that the Reserve Bank will cut [the Official Cash Rate] by 25bps [to 2.5%] in December.
"Moreover, we continue to see potential for further cuts over 2016."
Total log inventory at Chinese ports has dropped to 2.6 million m3 as reported for the first week in November.
Export log prices rose $8-$18/JAS m3 depending on grade and port.
Our recent trip to China uncovered innovative ways this market is making use of our Radiata pine, diversifying demand away from the past high reliance on the apartment construction market.
Log inventory in China is expected to continue to drop, to perhaps as low as 2 million m3. Indian, Korean and Japanese log demand is also steady to strong.
Rapid increases in CFR price has meant a wider-than-usual range of pricing across the various export log purchasers operating around New Zealand. Intense competition for logs at ports such as Wellington has seen log prices there at parity with the bigger ports like Tauranga and Marsden Point (Wellington prices are usually at a discount to the bigger ports).
Some domestic log processors are feeling squeezed and struggling to secure adequate log supply as harvesting levels declined through the winter and now export prices are rebounding quickly.
Demand for housing-related timber and wood products is strong, but so is supply and many wood products' pricing is "sticky" - hence the squeeze. Activity in the residential dwelling construction market in Christchurch is declining whilst the construction of commercial buildings is rising. This tends to reduce demand for wood products in favour of concrete and steel products.
PF Olsen staff were on a log market intelligence trip in China late October/early November. The following section includes observations and insights gained from the trip.
The housing market in China is clearly subdued. Tall cranes stood like sentries over countless grey concrete towers of partially constructed apartment blocks - some of the cranes were swinging and lifting, but many appeared idle. Then there are the numerous completed apartment towers with large Chinese writing across the facades and the telephone number to call if you want your dream home - and maybe a bargain at the moment.
But that's old news since the housing downturn in China commenced over a year ago.
From logs to apartments. Whilst little Radiata pine is used on constructing these concrete buildings, so many have been built over the past five or so years that demand for Radiata pine has surged. Future demand, however, will be subdued for some time as excess housing stock is cleared.
What become apparent as our trip progressed, however, was that Chinese wood processors were finding new markets, and innovative ways of processing Radiata pine into the new products.
A leading integrated wood processor in the Shandong region (the Lichen Group) was producing little lumber for construction since the price was described as "terrible". It was, however, flat out producing a whole range of other products for which there was strong demand. For example, we were told Lichen could double its supply of Radiata pine doors being exported to the USA from current levels. The limitations to doing this were log supply and (surprisingly) labour. This is related to the high level of wage inflation in China as the population urbanises.
Demand for Radiata pine doors from China to the USA exceeds supply.
Other "in demand" products were:
- edge-glued panels (both finger-jointed and long lengths)
- lineal mouldings and (picture/mirror) frames
- components of composite mouldings and doors
This composite moulding comprises finger-jointed Radiata pine, MDF and a paper-thin decorative hardwood veneer. Whilst is doesn't look like much Radiata pine is being used here, think of the millions of lineal metres of the product that could be consumed in China and globally.
The important implication of the above trend of new markets and products is that it provides an alternative (and potentially strong) market for unpruned, utility logs (the A and K grades). If the trend grows, then Radiata may successfully diversify away from the current over-reliance on the Chinese apartment construction market, and instead be exposed to a larger range of markets and end uses (both domestically in China and markets to which China exports). This also bodes well for the long term when mass urbanisation ceases in China.
The strong price of pruned Radiata pine logs in China is also a manifestation of the high demand for furniture, clear boards and panels, and the reduced supply of South Sea and illegally sourced hardwoods.
A Radiata pine wine storage unit made from finger-jointed edge-glued wood.
These new markets and end uses also raise some new changes around wood quality. Whilst it doesn't matter if A-grade logs are sap-stained when they are cut into construction lumber, it does matter if they are manufactured into appearance grade products. If sap-stained, these products then have to be stained or coated and are less valuable.
As a consequence of more focus on appearance grade products resin has become new issue for Chinese wood processors of upruned logs. This is not just resin pockets (an identified issue in pruned logs in the NZ wood industry) but also high resin content generally in unpruned logs which again prohibits their use visually; even coatings can be affected as the resin tends to seep through them.
Heavy resin, or oil as the Chinese call it, degrades appearance products made from unpruned Radiata pine logs (photo above). In construction end-uses resin is not an issue. This may, however, require a re-think on how we source and grade unpruned logs destined for this use.
PF Olsen Log Price Index - November 2015
The PF Olsen log price index rose eight points from $103 last month to $111 this month. It is now $26 higher than its cyclical low of $85 in November 2011 and $8 above the two-year average and $9 above the five-year average. Pruned prices [export pruned logs at some ports] are reaching prices not seen since 2001 when domestic pruned logs exceeded $200/tonne.
As reported last month, domestic structural log prices are also relatively strong.
Basis of Index: This Index is based on prices in the table below weighted in proportions that represent a broad average of log grades produced from a typical pruned forest with an approximate mix of 40% domestic and 60% export supply.
Indicative Average Current Log Prices - November
|Log Grade||$/tonne at mill||$/JAS m3 at wharf|
Note: Actual prices will vary according to regional supply/demand balances, varying cost structures and grade variation. These prices should be used as a guide only.
Log Price Outlook
With continued drops in log inventory in China and relatively strong demand from Korea, India and Japan, CFR prices are expected to continue to firm and flow through to NZ at-wharf-gate prices. The strengthening of the NZ$ against the US$ in the second half of October lost momentum and the cross rate has been falling so far through November. If this continues, it will further support higher NZ$ at-wharf-gate log prices in December. CFR prices have moved up to about the four-year average and are probably not yet high enough to stimulate significant supply from other sources (e.g. Russia and North America). Demand from China is expected to continue to be reasonably strong as Chinese wood processors divert attention away from the weaker construction lumber market to the more buoyant furniture, door, appearance and remanufacturing market segments. These are supported by the resurgent USA housing market and renovation and refurbishment in China and Korea.
Other positive factors for the Chinese market are:
- improvement in the housing market in 1st tier and certain 2nd tier cities (but as yet little flow through to 3rd tier)
- a further loosening of the one child policy
- political commitment to target medium-high growth which translates to annual GDP growth of 6.5%
The domestic log market is expected to remain strong with domestic processors vying to secure log supply to keep their order's fulfilled.