• The Weekly Dairy Report: Dry tightens in the south but North Island spring conditions delight

    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.


  • The Sheep, Deer and Cattle Report: Sheep farmers very disappointed at early lamb returns


    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.

  • Agriculture excluded from scope of government's Emissions Trading Scheme review

    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.

    A discussion document has been released on the Ministry for the Environment’s website. And you can see more on the issues here.

  • Dairy and arable farm prices down on last year but horticultural properties go from strength to strength

    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:

    Also, see details here.

  • Fonterra's $4.60 milk price forecast under pressure as Whole Milk Powder prices slide another 11%

    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."

  • Keith Woodford says changing China's child policies will only benefit dairy briefly. Tourism & old-age products are where big changes will occur

    By Keith Woodford*

    China’s recently announced change from a one-child to a two-child policy has led to considerable media comment, including from our own Prime Minister at the New Zealand China Business Summit on 9 November. The media focus has been on the demand this will create for infant formula.  However, much of the commentary has lacked an understanding of China’s demographics.

    Relaxation of the one-child policy will lead to a short term increase in birth rate but it will only be short term. The reason for this is that the number of women in the child-bearing ages is about to decrease drastically.

    There are three factors that determine China’s birth rates:
    1.  The number of women in the child-bearing age groups
    2.  The number of children these women wish to have
    3.  The number of children the Chinese State says they are allowed to have.
    This third factor only comes into play to the extent that it constrains the second factor.

    The best way to understand the situation is to have a look at China’s so-called population pyramid, reprinted here from Wikipedia under a creative commons licence. This pyramid is constructed from the latest China Census in 2010. As such, the ages of everyone in 2015 are another five years from what is shown here.

    China’s population pyramid as at the 2010 census

    To understand the graph – which has unique features compared to any other country – we need to go back in history to the founding of the Chinese People’s Republic in 1949.  The reason for this is that ‘echo’ effects of what was happening then can be seen right through to the present.

    Following decades of internal turmoil, China achieved a level of internal stability throughout much of the 1950s and the population soared. At that time, Chinese women typically gave birth to between five and six children over their child-bearing lives. 

    Things changed drastically in 1959 with comprehensive drought and also linked to the failures of the so-called ‘Great Leap Forward’.  In the three years from 1959 through 1961, births only averaged 15 million per year compared to about 20 million in the preceding years. In the worst year of 1961, there were less than 12 million births.  This shows up right through to the present, with a markedly reduced number of people in the 2010 population pyramid aged 49 to 51 (i.e. currently aged 54-56).

    Once China got over the drought and what could now be termed the ‘great leap backwards’, births surged to almost 30 million in 1963. From there on, births declined steadily through to 1979 at just over 17 million per annum.

    The declining birth rate post 1963 was predominantly a function of Chinese women deciding to have a lot less children, which has been a phenomenon common to most developing and developed countries. Although this decline was occurring well before China’s one-child policy (implemented in 1979), there was definitely, from the mid-sixties, a set of Government policies to encourage these changes.

    In amongst all of this there was one year when births were considerably lower than other times. This was in 1966, a year of disruption from the Cultural Revolution, when people had other things on their minds rather than making babies.

    When I first went to China in 1973, we were shown clear evidence of programs encouraging use of contraceptives and also encouraging couples to delay marriage. I also recall having discussions with one of our interpreters - a young lady in her early twenties - about the large number of unmarried mothers in Western societies. She could not understand how this could be biologically possible, no doubt based on her own experiences where unmarried folk never had the opportunity to be alone.

    The one-child policy was implemented in 1979 but in fact had no observable effect on the overall number of births. Indeed births actually increased in the years thereafter.

    This paradoxical situation was because the huge cohort of women born in the 1950s was now coming through to child-bearing age. Any reduction in births per mother was more than compensated by the large number of potential mothers.

    So births increased again through the 1980s to reach a maximum of 25 million in 1987. From there it decreased steadily to some 15.9 million in 2010. (The population pyramid shows even less than this for 2010 births, but this is probably because the 2010 national census was taken at 1 November, and so two months were still to come.)

    Since then, from other Chinese data we know that birth numbers have increased slightly to an estimated 16.8 million in 2014.  This increase is mainly due to progressive relaxation of the one-child policy. First, it was couples who were themselves both from one-child families who were allowed a second child. Then, it was couples where only one of them was from a one-child family. And now it will be everyone who can have two children.

    When policies such as these are relaxed then the immediate effect is to release a pent-up baby demand. There will be lots of couples in their thirties who will say let’s get on and have the second child before nature gets in the way. However, that pent-up demand only lasts for a couple of years before it settles down again.

    Looking back, one can see how the one-child policy, although abhorred in Western countries, was important in bringing China’s population under control. However, with hindsight there is now a strong argument that it should have been relaxed many years ago. Already China’s working age population is in decline, with more people retiring than entering the workforce. That will increase over the next ten years even if China raises the retirement age.

    The reason that the uptick in births over the next few years will be short term is because the number of women coming through into child-bearing age over the next 20 years will average less than eight million per year. Each of these women would need to have more than two children just to maintain births at the current level.

    In contrast, the current evidence is that many Chinese women do not want two children. So unless there are considerable changes in societal attitudes, birth numbers will, by 2020, be declining again.

    There are also considerable regional differences to be considered. For example, according to Wikipedia, the 2010 census reported a total fertility rate (TFR) of 1.18 (0.88 in cities, 1.15 in townships, and 1.44 in rural areas).  This fertility rate measures the average number of children per woman. The five regions with the lowest fertility were Beijing (0.71), Shanghai (0.74), Liaoning (0.74) Heilongjiang (0.75) and Jilin (0.76). Apart from Shanghai, these are all in the north. The provinces with the highest fertility rates were Guangxi and Guizhou, both poor southern provinces, with 1.79 and 1.75 respectively. The county with the highest birth rate was Baqing County in Tibet with 5.47.

    These differences illustrate a point I often try to make: there are many ‘Chinas’. Policies are often implemented pragmatically across the nation. Also, ethnic minorities were always exempt. And there is also the old Chinese proverb that ‘the sky is high and the emperor is far away’.

    One of the remarkable features of Chinese births is the high proportion of males, currently about 18 percent more than females. The natural birth ratio should be about four percent more males at birth. The difference from the natural rate is primarily due to selective aborting of female foetuses based on ultra-sound. (In the population pyramid, the ‘excess’ males show as very dark blue).

    The natural difference in birth rates between the sexes has minimal importance in growing populations where men typically marry women who are several years younger.  But where population rates are falling, and combined with selective abortion of female foetuses, the effects are profound.

    So over the next 20 years there are going to be 20 million Chinese men coming through to adulthood for whom there are no female partners. This is a situation we have never seen anywhere in the world. Will Chinese women be allowed to marry two men?

    From New Zealand’s perspective, and recognising China as inevitably our most important trading partner of the future, the big message from the population pyramid relates more to older folk than to babies. Over the next ten years there will be a huge surge in the 55 year plus age bracket. So it is tourism and old-age products rather than infant formula where the big change will occur.

    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

  • The export log market has rebounded more strongly than expected, says Peter Weblin. Demand from multiple markets. China using Radiata in innovative new ways

    By Peter Weblin*

    The export log market rebounded much more strongly than expected in November on the back of rapidly reducing log inventory in China and concerns about log shortages.

    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
    • furniture

    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.

    Wine unit

    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.

    Log Price Index - November

    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
      Nov-15 Oct-15 Sep-15 Aug-15 Jul-15 Nov-15 Oct-15 Sep-15 Aug-15 Jul-15
    Pruned (P40) 171 170 168 169 170 185 175 162 165 165
    Structural (S30) 103 102 101 102 103          
    Structural (S20) 96 95 94 93 93          
    Export A           111 96 82 92 96
    Export K           106 90 75 86 90
    Export KI           94 82 70 79 84
    Pulp 50 50 50 49 50          

    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.


    This article is reproduced from PF Olsen's Wood Matters, with permission.

  • The Weekly Dairy Report: Higher dividend prediction could be lost with dropping payout after the auction result

    More recent useful rains has lifted farmers spirits in the south, but mixed with days of cold temperatures has done little to lift pasture growth rates that are needed for the silage harvest.

    In the North Island significant moisture has fallen  to improve grass growing potential more to the norm, and managers can now plan further ahead with rotations and the conservation of pasture surpluses.

    Mating management indicators of 90% submission in 3 weeks has been reached by many as the gold standard for joining, but some dry poor producing cows are still being culled to the saleyards and the works, but now on a falling schedule.

    Mid October bobby calf processing numbers reveal totals are well back on last year suggesting more animals have been reared or cows were culled heavily before calving.

    The market news has not improved with analysts again predicting more falls at this week’s milk auction, and now suggest that Fonterra may have to lower the forecast downwards in late November.

    And overnight that just what has happened, with the global dairy auction falling another 7.9%, and the key ingredient whole milk powder back 11% to US$2148/tonne.

    This latest falling trend that has taken over 18% out of global dairy prices in the last three auctions will have surely severely dented the Fonterra forecast payout and an adjustment downward next week seems very likely.

    A surprise announcement from Fonterra on Monday resulted in a 0.5c lift in the predicted dividend for 2015/16 season to 0.45-0.55c/kg ms which is at last a recognition that the huge investment in added value capital is  returning value, especially in these times of low prices for milk.

    While milk volumes offered have been lower at auction and New Zealand’s production projections back by 5-6%, global flows especially from Europe have not followed this countries lead, and this extra supply has weakened demand.

    The Reserve Bank has again expressed concern about dairy debt which has increased dramatically in the last 12 months, and insisted the banks apply the stress test on their dairy portfolios.

    The ANZ bank economist believes dairy farmers need to reduce their costs permanently by 0.50c-0.75c/kg ms as an adjustment to the “new lower” income levels which seem may be around longer than first predicted.

    Farm spending has tightened significantly especially in the dairy regions, and as an indicator, tractor sales have dropped in some of those provinces by as much as 30%.

  • The Sheep Deer and Cattle Report: Wool prices retain price levels but all meat schedules fall sharply


    More big falls for lamb schedules as the Christmas chilled market has passed and frozen processing follows, in a market still carrying too much stock.

    Some commentators predict falls of over a $1/kg CWT by Christmas and with the colder weather in the south slowing animals to finish, weights could also be back.

    Saleyard prime lambs are now easing back with the export market, helped by a local trade schedule drop of 20-30c/kg cwt and a slowly increasing supply.

    Early seasons store lambs are appearing in the South Island eastern areas short of feed, and are being sold at rates $10-$20/hd behind last year, adding further to the financial burden of dry land farmers but better feed conditions in the north has seen prices $20/head better.

    The two big processors have announced their annual results with Silver Fern Farms leading Alliance in the profit race by a considerable margin, especially considering how much debt was repaid.

    Debt reduction is the area where Silver Fern Farms has made the most progress with equity now ahead of its Co-Operative counterpart after years being branded with a big mortgage laden tag.

    With a bigger share of sheep meat processing and less beef capacity Alliance was not able to balance the differing market prospects like its main competitor, and with the new Chinese partnership deal looming, prospects look tough for the southern Co-Operative.

    Alliance is championing a clear new strategy for the future, but poor early seasons prospects for frozen lamb and sheep numbers still falling does not help create a quick profit turn around.

    The latest North Island wool auction saw a near full clearance of crossbred wools as Chinese interest awakened, the currency weakened, and indicators lifted by 9c/kg clean.

    Local shearing contractors applauded the quality of pre lamb wools they have handled this year, but express concern at interruptions in their shearers work flow, caused by the lack of merino wethers now being farmed.

    More falls in beef schedules as weak market signals from the US driven by the last of the quota volumes arriving at ports,  volumes processed increasing, and southern farmers destock for the approaching dry, all affect market confidence.

    Manufacturing cow and bull prices are now below where they were last year causing some nervousness, but one bank analysts study of the US beef market situation is optimistic for a turn around next year.

    In the saleyards prime steer prices are also easing as more animals reach target weights and the local trade schedules follow the export falls.

    The regulatory environmental changes that have had a huge impact on the dairy sectors cost structure, are now entering the sheep and beef farmers domain, and managers need to consider the implications especially as they intensify their stocking systems.

    Demand for quality dairy weaners in the North Island has been maintained as more animals are offered for sale with beef cross genes attracting the best premiums.

    Less dairy calves have been harvested for bobby veal suggesting more have been reared or culled pre calving in the cow, so later sales of weaners may reveal how the present lower bull schedule will have on demand.


    More venison frozen production schedule falls this week but prices are still about $35/hd ahead of last year and with demand from now a diverse range of markets,  prospects look good for a continuing revival for venison.

    The older stags velvet harvest is nearly at it’s peak and the potential of young stags heads soon to be revealed, as this sectors heavy investment in superior genetics has lifted per head production significantly.

    Deer Industry NZ reveals the velvet excise tax removal as a result of the free trade agreement with Korea will encourage buyers from that country to source more product direct from NZ.

  • Giant dairy co-operative Fonterra has lifted its predicted available payout by 5c; sees likely dividend in 35c-40c range; total cash payout could be up to $5

    By David Hargreaves

    Dairy co-operative Fonterra's boosted the forecast available payout range for this season by 5c and is indicating the dividend might be in the 35c-40c range - giving a potential total payout to farmers of $5 per kilogram of milk solids.

    The new forecast was given in a business update Fonterra issued today. Fonterra also issued a global update.

    Last year Fonterra managed a dividend of 25c, which farmers believed was a disappointing result. Coupled with the final milk price of $4.40 per kilogram of milk solids this gave a payout for the year for farmers of $4.65.

    Fonterra recently announced that it was cutting jobs as part of restructuring. Originally it was stated that 523 would be cut. Then it was moved up to 750. The company confirmed today that the total number of redundancies was now 835.

    At the moment Fonterra's forecasting a milk price of $4.60 for the current season and it is still sticking by that, despite likely further falls in global dairy prices this week. Chairman John Wilson reaffirmed today that the company was still expecting dairy prices would move up in the first half of 2016 - and the $4.60 forecast was based on that continued expectation.

    Its original forecast for this year suggested that another 40c-50c, on top of the milk price, might be available for dividend payout, though it stopped short at that stage of suggesting what the actual dividend might be.

    Now its raised the forecast available payout range to 45c to 55c.

    "At this stage of the season based on the dividend policy, management would recommend at the end of the financial year an annual dividend of 35-40 cents per share, which would then be subject to Board approval,"  Wilson said.

    "This would equate to a total forecast cash payout of $4.95 -5.00 per kgMS."

    Fonterra is also increasing the rate at which farmers are paid the Co-operative Support of 50 cents per kgMS, with the total amount paid up to December going from 18 cents to 25 cents.

    The predicted boost in operational performance by Fonterra comes amid expectations that this week's GlobalDairyTrade auction will see a third consecutive slump in dairy prices, and with bank economists believing the $4.60 forecast milk price by Fonterra may come under pressure.

    ANZ rural economist Con Williams said NZX futures are pointing to a substantial drop of 15% for Whole Milk Powder (WMP) this week.

    "Some of the reasons for the expected decline in powder prices is buyers are largely well stocked, there has been an increase in sellers with older milk powder (less shelf-life) recently, some European SMP has recently been rejected from intervention stocks due to packaging issues and the general lacklustre performance of the rest of the commodity complex.

    "To us, a 15% drop for WMP looks too much. On a valuation basis this would place New Zealand sourced product below Europe and the US again. Additionally, there has been another 20,000 mt reduction in WMP auction volumes due to lower New Zealand supply and many analysts/buyers following the last auction suggested it was a good time to re-establish hedges.

    "We expect a drop in prices this week, but struggle to see it being 15% for WMP.

    "That said further falls in powder prices will place downward pressure on Fonterra’s current milk price forecast of $4.60/kg MS (we are currently at $4.25-$4.50/kg MS). This is expected to be reviewed at the 9th December board meeting," Williams said.

    Fonterra's Wilson said the co-operative's performance in the period  August 1 to October 31 had built on the strong second half of the 2015 financial year.

    “While it is tough on farm due to low global milk prices, farmers will welcome the ongoing improvement in Fonterra’s performance delivering increased returns.

    “Performance is well ahead of last year and we are hitting our targets on gross margins and operating and capital expenses."

    The Co-operative is continuing to forecast a reduction in milk collections in New Zealand for the current season "of at least 5%", which is equivalent to around 150,000 MT of Whole Milk Powder.

    Fonterra chief executive Theo Spierings said performance in the first quarter of 2016 built on the strong finish to 2015 with margins increasing across the group from 14% to 23% compared with the same period last year.

    “Our first quarter ingredients performance reflects improved product stream returns and margins are tracking well.  With less milk this season, and additional capacity, we have taken the opportunity to optimise our product mix," Spierings said.

    “We are delivering continuing growth in consumer and foodservice sales volumes and value, particularly in Greater China, Asia and Latin America.”

    Capital expenditure of $258 million is down 37%, in line with the target. Operating expenses are also down by 4 %to $628 million, "reflecting the continuing focus on cost control".

    Mr Spierings said Fonterra has solid credit ratings that demonstrate the co-operative’s fundamental financial strength.

    “Following the completion of our accelerated investment cycle and with our ongoing financial discipline, we are on track to reduce our leverage, with the gearing ratio expected to return to the 40-45% range at the end of the current financial year.” 

    Fonterra’s business transformation is aimed at achieving a significant and lasting performance improvement through new ways of working across the Co-operative’s global network, Spierings said.

    “The initiatives generating recurring benefits implemented in the first quarter are expected to deliver a cash benefit of $170 million in the current financial year.

    “Further initiatives in the second quarter are expected to increase recurring cash benefits to $340 million and contribute to both earnings before interest and tax (EBIT), and the Farmgate Milk Price in the current financial year.

    “In addition, first quarter initiatives are expected to generate a one-time cash benefit of $110 million this financial year increasing to $440 million based on initiatives being introduced in the second quarter, and will contribute to working capital and our balance sheet,” Spierings said.

    Fonterra will provide an update on the business transformation and on the earnings range forecast at the completion of the first half of the financial year.

    Fonterra's full annual review is available here. Its full financial review is available here. The annual results presentation is available here.

    See here for dairy payout history.

  • Keith Woodford looks at the downstream realities for dairy farmers and concludes that, despite the upfront costs, non-seasonal free-stall barn systems will better respond to what value-add markets need

    A New Zealand free-stall barn system. (Courtesy of Calder Stewart)

    By Keith Woodford*

    Recently, I have been writing about what we need to do in New Zealand to climb the agri-food value chain. I have been emphasising the importance of China – there really is no alternative – and the associated need for an integrated ‘NZ Inc’ approach to online selling direct to consumers. 

    The products we need to be selling through this dedicated and integrated ‘NZ Inc‘ portal (but also linked into the major Chinese online portals) include dairy, meat, wine, fruit, jams, biscuits, chocolate, and bottled water.  Indeed almost anything else we manufacture for ourselves that has a shelf life of more than a few days, we can also manufacture for China. 

    For most products, the big changes we need to make are post-farm-gate.  However for dairy we also need to make big changes down on the farm. Specifically, if we want to capture the value-add opportunities, we will need to build non-seasonal capacity into our industry. 

    The New Zealand dairy industry has been built on seasonal production.  We have focused on spring calving and then following the seasonal pasture production curve. Until recently, it has been predominantly about low-input systems and production of long-life commodities. Whole-milk-powder has been the perfect product for that system.

    There are only two major producers of whole-milk-powder in the world. They are China as Number 1 and New Zealand as Number 2.  In terms of consuming countries, then China is far ahead of everyone else. And in terms of import countries, it is also China that is by far the Number 1.  In terms of exports, New Zealand is totally dominant.

    There is little doubt that over the coming years China will consume more dairy. But will it consume more whole-milk-powder?  I think the jury is very much out on that one.  As long as we are so dependent on whole-milk-powder, then we are relying on China taking a different consumption path than every other country.

    Rod Quinn, the CEO of Westland Dairy Co-operative, made the point recently to his suppliers that whereas our milk powder exports to China have gone backwards in the last 18 months, the value-add markets in China have continued to grow at between 10 and 30 percent per annum. What he did not point out was that New Zealand has been losing market share to the Europeans in all of these value-add products.

    If we decide that we need to further diversity to products other than whole-milk-powder, then our seasonal system becomes an increasingly important constraint.  These other products require higher investment in processing plant.   And whereas low plant utilisation might be acceptable for simple products like whole-milk-powder, this becomes increasingly problematic with higher-cost processing.

    Under seasonal dairying, the peak weekly flow of milk in spring is about four percent of annual production. This means that overall plant utilisation only runs at about 50 percent.  In contrast, our major competitors run their processing plants at around 90 percent.  

    This week I heard our Prime Minister John Key refer to his recent opening of the Yashili infant formula plant at Pokeno, south of Auckland. He turned to Fonterra’s Theo Spiering and said he now knew where lots of Fonterra’s and also some of Westland’s milk powder were going. Apparently Yashili has a warehouse, described by the Prime Minister as 50 times the size of the Great Hall at the Langham Hotel where we were sitting, which is full of milk powder.

    Now most people might assume that all of this milk powder was simply going to be mixed with other ingredients to make infant formula. But that is not quite the way it happens.   Some quick inquires with industry folk confirmed to me that the first step is actually to put all the water straight back into the milk powder to do a wet mix.

    So what does it actually cost to take the water out and put it back in again?

    The answer – at least for the first part - is available from Fonterra. In this last year, the corporate arm of Fonterra charged its farmers $1.76 per kg milksolids to process the milk into powder. This processing figure is seldom talked about, but it is the key difference between what Fonterra gets paid for milk powder, and the amount which flows through to farmers.

    So why don’t companies like Yashili just purchase the raw milk and get on with the process of making the infant formula without drying and then rehydrating the product? The answer is that they need a steady supply for 12 months of the year. In almost every other country of the world this is possible, but with our seasonal production systems it is not.

    There is also another issue with seasonal production, and that is the changing composition.  This week I have been told of an international company that is investing in Australia – rather than New Zealand - because of access to a 12 month supply of milk with consistent composition. Also, it is no accident that the Fonterra-Beingmate joint venture for infant formula will manufacture at Darnum Park in Australia, rather than in New Zealand. Fonterra also has a New Zealand infant formula plant in the Waikato (Canpac) but it idles along as an under-utilised white elephant.

    By now you will be getting the gist of where I am heading. The simple message is that companies can afford to pay considerably more for a steady and consistent supply of milk 12 months of the year. And New Zealand dairy has to go down that route if it is to be in the value-add game.

    Fonterra already pays modest premium for all milk outside the peak production months of September to December. In 2014/15, the premium was 52c per kg milksolids. This year it is 51c. Some farmers also get additional premiums for 12-month supply to specialist factories, such as the mozzarella factory near Timaru.  One farmer tells me his overall payout this year will be 85c per kg milksolids more than the standard Fonterra payout because of seasonal premiums.

    So the non-seasonal journey in New Zealand dairying has indeed begun, but there is a lot further to travel.

    Already I can hear the groans from farmers. Under New Zealand’s pasture-based conditions, winter milking can be a real pain. Accordingly, in most parts of the country, off-paddock-wintering -systems need to be part of the 12 month-a-year milking story. And if we are going to get it right, both for the environment and animal welfare, it means free-stall cow barns, where cows have their own mattress beds.

    By now the groans will be rising to a crescendo. And many farmers will have turned off. This is madness, they will say.    Or in more polite terms, and having cooled down a little, then the message will be that ‘this is one path I am not going to travel; it is going to cost lots of money and it is going to increase costs’. 

    Well, that attitude is OK as long as farmers are happy to be producers of commodities in a world that is largely going value-add, and as long as their on-paddock wintering will satisfy increasingly stringent nitrogen leaching conditions that now hang like a sword across much of the dairy industry.

    Personally, I am not too concerned about the capital cost, even with figures of up to $5000 per cow for the total housing plus effluent system. Most of the 50 to 60 farmers who have already gone the free-stall way would say that in any case the costs I am using here are far too high. But I have become a strong believer that paying more and getting the system right is actually the best way to go.  So those are the figures I am now using as a genuine ‘all-up’ cost  - much higher than I would have used 12 months ago.

    Farmers who go the free-stall way typically raise their per cow production by about 150 kg of milksolids per cow.  This is typically through a combination of higher peak production, a more sustained peak, and longer lactations.  Whereas pasture-based farmers struggle to get a lactation length of more than about 260 days, with cows being dry for the remaining 105 days, in a free-stall system the dry period can be reduced to about 45 days.   My calculations are showing that under these systems, the overall capital investment per kg of milksolids is actually less than for traditional farming systems in New Zealand.

    As for the operational costs, I agree that these – and in particular feed cots - will be the crucial issue. But once again I am confident there are solutions. In the last week I was emailed by a rural professional who said that he has two farmer clients who are making the system work brilliantly – my words, not his – with a free-stall system. Their farm working expenses this year will be a maximum of $3.50 per kg milksolids, and they are sailing along very nicely even with the low payouts.   

    Those two particular farmers are still working within a seasonal system. However, my experience is that most famers with free-stall barns do end up eventually shifting to non-seasonal production. 

    Clearly, we still have lots to learn about non-seasonal dairy production under New Zealand conditions. To me, it is very evident that free-stall barns are part of the solution. But we still have work to do to optimise the feeding for these cows under New Zealand conditions.  The way forward will involve a range of feed mixes that include a combination of pasture, other forage crops, and harvested fodder. Compared to our American competitors, we will make less use of grain.

    As with all journeys, there is scope for false steps. Even with traditional pasture-based systems we have some farmers who do it brilliantly and some who stumble. And it is in a year like this one, when prices are low, that the stumbles typically occur. It will be the same with non-seasonal farming. Not everyone is going to get it right.

    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

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