• Allan Barber wonders if Fonterra has actually captured the 'value' and 'velocity' gains from its new focus on value extraction

    By Allan Barber*

    Fonterra’s conservative forecast of $4.25 for next season has surprised analysts who were generally expecting a forecast payout between $4.50 and $4.80 per kilo of Milk Solids.

    In contrast Westland Milk Products has announced a budgeted payout of $4.55-$4.90 which includes an estimated 48 cents for value added product above the base price for skim milk powder.

    A further contrast is that Fonterra’s forecast includes no added value component which will be announced in July and when added to the $4.25 will comprise the total available to farmer shareholders. Therefore on balance there may not be a great deal of difference between the two companies.

    However as we saw during the course of the 2015/16 season, the price announced as a  forecast before the start of the season only serves as an indicator of what farmers can expect to receive as advance payments during the season. The final payout may bear very little relationship to what was forecast at the beginning of the year in response to changing circumstances.

    I imagine Fonterra has taken a once (or even several times) bitten twice shy approach to this forecast, because, while there must have been a temptation to give farmers some good news, there would have been an even greater encouragement not to overestimate what was achievable.

    The credibility of Chairman John Wilson and more particularly the $5 million man, CEO Theo Spierings, has taken a serious knock from the consistent failure to predict the extent of the downturn, when every observer was picking bad news from global markets. So finally Fonterra’s forecasting skills seem to have caught up with market reality and there appears to be no way they will risk getting ahead of the game. After all, nobody will blame them if they actually manage to lift the payout above the forecast; there will just be a collective sigh of relief.

    In Fonterra’s media release, Spierings says the long term fundamentals for global dairy remain positive with demand expected to increase by two to three per cent a year due to the growing world population, increasing middle classes in Asia, urbanisation and favourable demographics. He goes on to say “China dairy consumption growth remains positive and its demand for imports has been steady over recent GlobalDairyTrade events. We expect these drivers to result in the globally traded market rebalancing. We will remain focused on securing the best possible returns for our farmers by converting their milk into high-value products for customers around the world.”

    In contrast Westland CEO Rod Quin is more cautious, saying in a media release “Prices remain under pressure as European and US dairy stock piles are now a feature of the market. Early contracts in our sales book are in line with budgeted prices, but market volatility with price movements, both up and down that can be sudden, make forecasting difficult. Based on what we see in the market today, with a forward view of global stock levels, customer demand and milk flows, we anticipate some minor increases for whole milk powder. However, we do expect pressure on skim milk and butter prices.”

    However Quin puts more flesh on the bones of Westland’s value added strategy, stating “The contribution to payout of our strategic move into value-add products – infant nutrition, EasiYo, retail butter and UHT milk and cream – is worth noting.” This statement is more reassuring than Spierings’ rather vague claim about Fonterra’s focus on securing the best possible returns by converting milk into high value products for the world’s consumers.

    After all Fonterra’s strategy gives the strong impression it has found itself compelled to build enough drying capacity to convert milk volume into powder at a  time when there are signs the world is moving when and where possible to fresh milk. It is clear Fonterra has increased its proportion of value added production, but not yet obvious it has got the value and velocity aspects of its three Vs strategy right.

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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 or read his blog here ». This article first appeared in Farmers Weekly and is here with permission.

  • Fonterra leaves current season forecast price at $3.90; expects improvement in market conditions over new season but urges farmers to be cautious

    By David Hargreaves

    Fonterra's opening milk price forecast for its farmers for the new season is $4.25 per kilogram of milk solids, while the dairy giant has kept its forecast for the current season at $3.90.

    The body representing Fonterra's farmers, the shareholders council, said the $4.25 forecast was a "tough number" to hear but represented the reality of where the market was at the moment.

    If the new season forecast remains in the low $4 range, this will mean three consecutive seasons of sub-$5 returns for farmers. See here for the full dairy payout history. 

    While economists had expected Fonterra to be cautious with its opening forecast, the figure came in below average market expectations of around $4.60. The New Zealand dollar fell by over a quarter of a cent against the American currency when the forecast was released. A short time ago the Kiwi dollar was trading at just under US67.3c.

    ANZ chief economist Cameron Bagrie and rural economist Con Williams said while cash flow for farmers in 2016/17 looks better than during the last 12 months, there is only a marginal increase and "it’s not enough to restore profitability".

    "...The sector is facing a long drawn out adjustment that is both cyclical (weak prices in the near-term) and structural (shifting supply dynamics).

    "When you map this against expected expenditure, many farmers are still struggling to break-even despite cuts in expenditure and other farm management changes to help re-adjust individuals’ and the sectors’ cost base. Until the milk price moves back above $5/kg MS (and higher dividend payments persist), it’s going to be difficult for many farmers to generate profit/breakeven.

    "...From an economy-wide perspective, continued dairy cash flow pressures will weigh heavily on many other support businesses. Despite the loss being less stark, they are accumulating to a higher level. Land values will also remain under pressure. The rubber will really hit the road for the sector in the back half of 2016 and 2017. Even under a price-rebound scenario, where the 2017/18 payout looks better, positive cash flow will not return until 2018." Bagrie and Williams said.

    Fonterra is required under the Dairy Industry Restructuring Act to announce its forecast milk price at the beginning of each season, which starts on June 1.

    Chairman John Wilson said the co-operative’s forecast took into account a range of factors, including the high New Zealand dollar/American dollar exchange rate, supply volumes from other major dairying regions, current global inventory levels, and the economic outlook of major dairy importers.

    "Conditions on farm are very challenging," Wilson said.

    He added, however, that the strength of Fonterra's balance sheet was enabling the company to increase the advance rate to farmers in the first half of the new season (to $3.01 per kilogram of milk solids).

    "We will also bring forward payments for this season’s milk. This will provide some assistance with on-farm cash flows.

    "We are doing this while remaining within our policies and maintaining our financial discipline."

    The New Zealand dollar was relatively high and was currently effecting milk prices and our forecasts, Wilson said.

    "We are expecting global dairy pricing to gradually improve over the season as farmers globally reduce production in response to ongoing low milk prices, however we continue to urge caution with on-farm budgets."

    Fonterra Shareholders’ Council chairman, Duncan Coull said the signal farmers had received from the opening new season forecast was that while there were encouraging signs  the market should move in a positive direction over the next 12 months - it would be slow to do so.

    "However, we as farmers are very well-tuned to volatility and its capacity to fluctuate and will have this front of mind as we work through our budgets for the coming year.

    "It is also important that we take into account that this is a forecast for a season which has not even begun so, as we move through the year it is vital that farmers continue to read the signals being delivered by the market and our co-op, and act appropriately.

    "Fundamental to this is that Fonterra communicates any significant pricing shifts to our Farmers in a timely and transparent manner."

    Wilson said Fonterra would announce the company's forecast earnings per share for the 2017 financial year in July as normal.

    In the current financial year the company has an earnings per share forecast of 45c to 55c and is aiming for a 40c dividend, with 20c of this already paid, another 10c about to be paid (on June 7) and a final 10c to be paid a bit later - though still earlier than usual to assist farmers.

    Fonterra chief executive Theo Spierings said the long term fundamentals for global dairy remained positive with demand expected to increase by 2% to 3% a year due to the growing world population, increasing middle classes in Asia, urbanisation and favourable demographics.

    "In addition to global supply growth slowing, we are seeing imports into major dairy markets improving compared to a year ago. China dairy consumption growth remains positive and its demand for imports has been steady over recent GlobalDairyTrade events.

    "We expect these drivers to result in the globally traded market rebalancing.

    "We will remain focused on securing the best possible returns for our farmers by converting their milk into high-value products for customers around the world," Spierings said.

    Coull said the opening advance rate to farmers spoke to the strength of Fonterra's balance sheet.

    "Farmers can look to this as an indication that their business is in a strong position, and that their board is aware of the current situation on-farm and has a desire to relieve cash-flow pressure where possible.

    "However, the current environment is placing additional stress on us all and as such there is a need for us all to continue stay engaged in our communities and support our friends and neighbours."

    ASB chief economist Nick Tuffley - who had expected an opening forecast of $4.80 - said the still-low milk price forecast was sending farmers a strong signal to keep focusing on costs. 

    "It is also likely to bring about a greater production decline over the season than the 3% we expected off the back of an assumed $4.80 milk price.

    "Potential for an even bigger supply adjustment will further reinforce the eventual upcycle in global dairy prices. After several years of strong global production growth NZ has already been responding to the weak price signal by cutting production.  Australian production is also responding, and EU production is belatedly starting to adjust. On the demand side, China’s dairy imports are starting to lift back up."

    ASB economists continue to expect an eventual milk price for the coming season in the region of $6/kg as the anticipated supply contraction and demand lift bring back price tension. ANZ's Bagrie and Williams said they "are inclined more toward the high $4/kg MS".

    "...But the price action in the July/August period will be critical. Something in the high $4/kg MS involves the NZD/USD trading around the mid-0.60 cents and wholemilk powder prices heading back to around US$2,500/t," Bagrie and Williams said.

    WMP prices averaged US$2252/t at last week's GlobalDairyTrade auction.

  • The Weekly Dairy Report: Most pleased this season is over and wait nervously for the starting price for 2016/17

    At last rain relief, with many of the dry areas receiving good moisture over the last week and more predicted as the drought spell is nearly over, but it’s effect will linger as temperatures drop with winters arrival.

    Demand for supplementary feed has increased from the dry areas, as the autumn drought takes it’s toll on all grass systems.

    Managers will need to keep a look out for further evidence of velvet leaf weed in their fodder beet crops, as a fourth seed line has been confirmed as contaminated.

    Winter feed budgets will have been done as managers look to plan for optimum body condition score and feed covers at calving, so next years production gets off to a good start.

    Numbers of cows being dried off have increased, but some with feed are milking through to the end of May to maximize production and minimize losses.

    Fonterra have declared another 10c dividend payment to be paid early on June the 7th to again help cashflows, and the sector awaits with interest the milk futures launch at the end of this week.

    Last weeks auction result saw milk commodities lift by 2.6% with whole milk powders again lifting above that rise, but skim milk powder fell again, reflecting a major global oversupply of that product.

    Some overseas analysts believe that the recent cool weather and weak prices are starting to curtail milk production in Europe, and this cannot come soon enough for the rest of the global dairy community.

    With next years predicted payout prediction due tommorrow from Fonterra, the ASB has suggested it will start at $4.80 and end at $6.00/kg ms.

    Fonterra Australia have had a very hostile response from suppliers to the drop in their payout price, and analysts suggest market share could fall after their poor handling of the downward adjustment.

    Back in NZ they also have had problems with temperature controls on some of their stored product with suggestions a significant bundle of stocks could be at risk because of incorrect levels to keep it safe.

    Oceania’s Glenavy expansion will require 200 extra jobs, and give the local economy a welcome boost from this development when other parts of the sector are retrenching.

    Fertiliser Co-Op Ravensdown has recognised the serious financial plight of many of its sheep and dairy shareholders, and are paying their $21/tonne rebate 3 months early, and reducing the price of Urea for important spring applications.

    The annual Dairy awards have been held and all in the sector should focus on how these high achievers have succeded  in achieving their goals, in what for all has been a difficult year.

  • Allan Barber investigates the issues being raised by disgruntled shareholders of Silver Fern Farms over the Shanghai Maling deal

    By Allan Barber*

    Trying to get a fix on the justification for the requisition to the Silver Fern Farms board has been a bit puzzling.

    If the situation is as cut and dried as the company’s media release claims, it isn’t entirely obvious why a group of 80 shareholders, including at least one past SFF chairman and former directors, would go to the expense and effort of requisitioning a special meeting and preparing a campaign to persuade fellow shareholders of its justification.

    To gain a better understanding I decided to ask one of the group’s frontmen, John Shrimpton, to explain to me why he is so passionate about attempting to overturn what appears to be almost a fait accompli.

    He said the requisitioning shareholders view the Shanghai Maling transaction as far from a done deal and lacking proper shareholder approval. He is at pains to emphasise the group has no desire to disrupt or damage the company’s business, while making it clear its members have great respect for the hard work done by Rob Hewett, Dean Hamilton and all employees to deliver such an impressive result last season, especially on debt reduction. But they have serious concerns about the proposed transaction and how it has been pursued with shareholders.

    In its 1 May media release the company states any resolution at the special meeting would not be binding and would have no legal effect, because the transaction has already been approved by a turnout of 67% of eligible shares voted with 82% in favour. Also the company claims it has signed a binding contract which requires it to complete the deal as soon as regulatory approvals are obtained.

    With all due respect to Shrimpton, it’s hard to see how this requisition and the process of preparing for the special meeting can fail to have a disruptive effect on the business, especially if the shareholder vote fails to ratify the previous decision. However he and his group feel strongly there is more than a matter of principle at stake here, as the proposed transaction involves selling 100% of the company into a JV which SM will hold a controlling 50% stake. It does not mean the sale of only 50% of the company which may not have triggered the “major transaction” clause.

    The Information Pack sent to shareholders in 2009 seeking approval for changes to the constitution to enable the introduction of new capital and a new governance structure contains some passages relevant to the present situation. It states, ‘A special resolution is required to make any amendments to the Constitution, or to enter into a “major transaction”. A major transaction involves the acquisition or disposition of assets which exceeds half the value of Silver Fern Farms’ assets prior to the acquisition or disposition….” The next clause states, ‘A special resolution requires approval by a 75% majority of the votes of all Shares carrying voting rights on the resolution and voting and must be supported by a majority of the votes exercisable by Current Suppliers and voting.’

    Shrimpton questions why, according to the notice of 28 September, the company spent $7 million of shareholders’ funds, presumably on a complex and opaque restructuring involving several new subsidiaries being set up after the announcement of the transaction, and what precise purpose this served. If the sole purpose was to avoid the sale of the whole business being considered as a major transaction, he wonders how this could possibly protect shareholders’ interests or be in the best interests of the company.

    Shrimpton further suggests a contract entered into without proper shareholder approval would be voidable, meaning it has no effect. He also considers another basis for the contract being voidable is if it can be demonstrated shareholders were induced by misleading representations to approve the proposed transaction.

    The nub of the requisitioning group’s arguments concerns the way the proposed transaction was presented to shareholders.

    Apparently many of them voted in favour of the October resolution, but have subsequently changed their minds when presented with the facts. One concern arises from the 28 September notice to shareholders announcing the special general meeting on 16 October and financial forecasts it contained. When the actual year end results were announced after the October vote, the net profit was almost double the forecast and net debt some 20% lower. In Shrimpton’s opinion these were materially different. Surely a company of SFF’s size should have had much more accurate information about the year’s financial performance two days before the year end and ought to have advised shareholders accordingly.

    Another concern which arises directly from the extent of the improved performance is occasioned by the respective equity ratios and debt levels of SFF and Alliance. The group finds it hard to believe the banks would have withheld banking facilities, as threatened, when SFF’s debt was lower than Alliance’s and its equity ratio superior. Alliance’s seasonal facilities were apparently renewed without issue, although two of the banks are common to each company’s banking syndicate.

    We will probably never know the banking syndicate’s reasons, although I would guess SFF’s banks would have been seriously influenced by annual performance volatility compared with Alliance’s more consistent performance. There may also have been a view 2015 was as good as it was going to get in view of inventory reduction and future livestock volume forecasts. This has already been borne out by Hewett’s statement this year’s result will be materially worse than last year’s, although budgeted profit was nearly twice as high.

    It appears the shareholder group has a valid reason for asking several questions which deserve clear answers from the company.

    The board undoubtedly views this as an irritant, but in the interests of shareholder democracy full disclosure ahead of the special meeting will be really important.

    It would be ironic if the long awaited OIO approval came through, but the shareholders changed their minds and voted not to approve the transaction. This would seriously test the legal opinions of each party.

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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 or read his blog here ». This article first appeared in Farmers Weekly and is here with permission.

  • The Sheep Deer and Cattle Report: Good lifts for most products this week as rain and snow arrive in the south


    More price lifts for the winter period, as schedules rise in response to shortages in the Middle East, and the Chinese market moving into it’s biggest consumption period.

    These lifts have been followed by saleyard sales, as last week’s prices averaged over $100 for prime lambs for the first time since November last year.

    Store lambs also rose, but numbers offered are sure to fall soon as the winter starts and quality feeds will be needed to keep the breeding flock maintained.

    Good rains have arrived for the dry areas but also snow on the foothills and with it frosts are sure to follow dragging soil temperatures and winter grass growth down.

    Most breeding ewes will have started their winter systems with the pasture rotations back to maintainence, especially in the dry areas where quality brassica feeds will be saved for later in the pregnancy.

    Many without surplus grass are using feed grains that are currently being traded at prices that are at the lowest levels for 6 years and a cheap source of quality feed to fill the gaps caused by these shortages.

    More government monies have been allocated to irrigation developments in the Canterbury region, and some for a scheme to recharge acquifiers with a goal to dilute nitrate issues in the Hinds catchment.


    The single South Island wool auction last week saw prices lift, as the slightly weaker currency and better styled wools attracted stronger demand.

    Prices rose from 1.5-6% on the last North Island sale but surprisingly 24% of the offering was passed, with vendors holding out for better prices, especially for stocks of lambs wool.


    Good lifts in beef schedules this week, as supplies shorten with the approach of winter, and demand strong in the chilled beef area.

    The US report, beef is having to compete strongly with cheap chicken and pork, as the market is unsure of how much stocks are being held for the demand ahead, especially as Australia supply is falling.

    NZ beef producers were warned by a Brazialian beef analyst of that countries growth in the global market, with genetics and cheap grain allowing rapid increase in carcase weights from that country.

    Bull sales have started and after big interest and participation on farm walks results from sales at the Beef Expo were disappointing with the top judged bull only making $6000.

    Unfortunately a fourth line of fodder beet seed has been found to be contaminated with velvet leaf seed and it now appears farmers will have to learn to control this weed in the future, as eradication is now an unrealistic goal.


    Venison schedules remain in their summer mode for another week, but the early chilled programmes are due to start in June and July, and prices are predicted to be strong.

    The sector will be buoyed by news of growth again after a long period of retrenchment, and the breeders in the foothills will enjoy better value for their female stock after years of unsustainable prices.

  • Keith Woodford says Fonterra's proposal to change its governance structure is stacked, with farmers only getting a take-it-or-leave-it option

    Is Fonterra on a path to a bad place?

    By Keith Woodford*

    Fonterra’s latest proposal for company governance has done little more than re-arrange the deck chairs from last month’s controversial proposal, which I have previously written about. 

    Some things are now more explicit. This includes that it will be two farmer-director positions that will go.  I see this reduction in director positions as being the Trojan horse.

    Many farmers have been convinced by the call from former directors Colin Armer and Greg Gent that reducing the number of directors would be a step forward, and it aligns with a widely held view that something at Fonterra needs to change. But reduced director numbers in itself will achieve nothing of substance.

    The reason that the proposal is a Trojan horse is that it lets in a revised director selection process that is fundamentally non democratic, and which take power away from farmer members.

    Fonterra itself is a business with assets of $19 billion and equity of $7 billion.  However, beneath this there are another set of land and cow assets that are owned by farmers that are worth – even at todays discounted rates – more than $60 billion, with more than $30 billion of this is now owed to the banks.  Why would farmers want to release their direct say in governance by relinquishing the power to select their directors?

    It is now explicit as to how the director nomination and selection process will be managed. This process is complex with multiple steps, and effectively keeps farmer shareholders well away from the selection process. 

    Although the proposed process itself is now explicit, the operation thereof will be clouded in secrecy.

    The only way for farmer shareholders to influence the choice of directors will be by rejecting the Boards own nominations. And then the process of finding an alternative director goes back behind closed doors.

    The new proposal, if accepted by farmers, will in the long term do more to alienate members than any event since Fonterra’s formation.   The danger is, that with farmers currently distracted by more immediate issues of cash flow and survival, the proposals will pass at the vote on June 10, simply because many farmers will have not engaged with the key issues.

    The required approval of 75% of farmer votes is a stiff target. But it is feasible that it could be achieved off a low turnout. This is particularly the case if the larger corporate-type farmers vote in favour.

    One has to ask, what has led the current Board to endorse these proposals. The support within the Board is supposedly unanimous, but is that simply because of ‘cabinet solidarity’? 

    We know that in the past a divided Board has chosen to present a united front under pressure from the majority.  It would be interesting to see each Board member stand up and explain why he or she is supporting the change.

    As a starting point, the proposal uses a common approach to choose both farmer and non-farmer directors, and in the process ignores the differences in situation.

    Non-farmer directors are meant to be chosen for specific skill sets that are otherwise missing in the overall Board.  This is best achieved by a private and confidential search, followed by tapping the desired people on the shoulder.  Democracy is not the way to get the right people to fill those specific roles.

    Under the revised proposals, it will be the nomination and selection committees that seek out both these non-farmer and also the farmer directors, but then the selected nominees will have to sell themselves to a series of public farmer meetings. Most potential non-farmer directors with the relevant expertise have a range of alternative options, and they will feel little need to allow their names to go forward into such a process. That is not the way these people operate.

    As for the farmer directors, the claim is that it will reduce the internal politics. In terms of double speak I am reminded of George Orwell’s 1984. 

    The new proposed system will be totally closed door until just before final acceptance or rejection of nominees by farmers. It will depend on the nomination and selection committees, dominated by existing Fonterra Board-think plus nominated independent non-farmer business people, and where those with new or provocative thinking will struggle to get a guernsey.

    The proposed process of director selection is highly complex with multiple stages.

    First there will be a nominating committee of two Fonterra farmer directors and two non-farmer directors. There will also be two Shareholders Council observers on this Committee. 

    This Nomination Committee and the Shareholders Council will then each appoint an independent business person to form a Selection Committee. This Selection Committee will then appoint a third business person as its Chair.

    The Selection Committee then appoints a commercial search agency to do the hard work of finding candidates for the Board on its behalf.  Fonterra farmers can self-nominate at this stage on a confidential basis for a farmer director position.    The search agency will interview the candidates and form a long list.

    At this stage the Selection Committee takes over to turn the long list into a short list.

    And then it goes back to the Nominations Committee (of four Fonterra directors) to make the final selection. Hence, it will be these four Fonterra directors who decide which of their colleagues should be re-selected, and how much new blood to let in.

    Wow!  If this isn’t the ultimate in networks and internal politics, then it must come very close.

    From here, the full Board and the Shareholders Council give their tick of approval (but supposedly without knowing who has not made the grade, as that is meant to be confidential). Alternatively they can give the selections a cross, in which case the process is repeated.

    Finally, farmers are presented with a list of candidates, with one candidate for each position. The names of unsuccessful nominees from earlier in the process still remain confidential.   Farmers then give a tick or a cross. If they give a collective cross, then the process once again repeats itself.

    Actually, there are comparable analogies from elsewhere. They are called communist party elections.  Essentially, this is the process they follow of selection and then public endorsement and ‘election’ of the chosen ‘selected’ candidates. 

    There are multiple problems at Fonterra, and some of these are a consequence of bad historical decisions going back many years.  They have come from weaknesses in leadership and weaknesses in diversity of thinking.  I have written previously about those on multiple occasions.

    However, none of the current proposals solve any of Fonterra’s current weaknesses. These proposals simply throw out the baby with the bathwater.

    Hopefully, enough Fonterra farmers will clear their minds of current distractions to recognise that this is not the path forward.

    Keith Woodford is Professor of Agri-Food Systems (Honorary) at Lincoln University and a Senior Fellow (Honorary) of the NZ Contemporary China Research Centre. His archived writings are at

  • Export supply tight into China and India holding up prices. Domestic demand remains strong. Returns to forest owner rising

    By Peter Weblin*

    This month export log prices were up $3-6/JAS m3 for unpruned logs and were unchanged for pruned logs. Domestic log prices remained largely unchanged as is usual for a within-quarter month.

    Export Log Market

    We are in a period where all the drivers affecting log price are moving up. Whilst higher US$ CFR log prices increase NZ$ at-wharf-gate log prices, a higher kiwi dollar and higher ocean freight costs decrease NZ$ at-wharf-gate log prices. On balance, the New Zealand export unpruned log prices rose in May and pruned stayed flat.

    Logs stocks in China are down to 2.6 million m3 and are close to levels seen in 2013. Back then we had a sustained period of steady pricing with modest increases throughout the year.

    Daily offtake/sales from China ports is reported at around 50,000 m3 currently. This makes log stocks equivalent to about 55 days’ supply, a figure lower than the past two year average of about 65 days.

    A-grade landed in China has traded in the US$ CFR 121-130 range April/May depending on destination port, timing and the supply arrangements. New Zealand export volumes have increased in March and April but the relatively low in-market inventories are supportive of firm pricing.

    Pruned logs are much less sought after currently as China moves into the hot “sapstain season”. Most of New Zealand pruned logs are supplied bark-on and after a trip across the equator and storage in hot and often humid Chinese summer weather, they are often heavily sapstained. Even the debarked and sprayed logs can have significant sapstain since many of them are subject to delays from the time of felling to treatment at the debarker. This greatly reduces the efficacy of the anti-sapstain treatment.

    The higher US$ CFR pricing is expected to stimulate more log supply from the Pacific North-West (PNW) (and maybe Russia) in the second half of the year, but this increase is expected to be modest at current pricing especially considering that the PNW has buoyant domestic markets to attract sales. Also, the record volume of export log supply from Australia last year is not expected to be repeated in subsequent years. This record volume was boosted by one-off effects such as the Queensland wind throw salvage and a short-term aggressive harvest programme by a large forest owner clearing older-age standing inventory. In summary, the supply side is expected to keep the market reasonably tight.

    The current stability in the China log market is also being reflected in our other main log export markets of Korea and Japan.

    India log import volume in May is relatively high. The market is steady enough, but with more exporters selling into India it has become a little less disciplined. It is probable that Indian demand will come under some pressure over the next quarter due to higher import volumes and the impending arrival of the monsoon in June which tends to reduce demand.

    Chart courtesy of Pacific Forest Products Ltd

    Domestic Log Market

    The month of May saw a continuation of the strong trend in the domestic log market. Prices were stable (being mid second quarter). To boost log supply of high-demand grades some mills have been lowering the minimum diameter specification on structural logs. For example, S25 is being substituted for S30 whilst holding price. This lowering of the minimum small-end-diameter from 300mm to 250mm effectively increases the yield of this log type from any given woodlot and increases the net return for the owner. It also increases supply of the high-demand log type to meet the mill’s log requirements.

    New Zealand’s current net migration gain of nearly 68,000 people per year is in stark contrast to the net migration loss of 3,383 people in 2012. Whilst adding to the risk of excessive inflation in house prices, the growing population is contributing to robust economic growth, demand for new house construction / house renovation and demand of wood products generally.

    The recently released manufacturing and services indices confirm robust economic growth, supporting an already buoyant property market. These trends are expected to continue for the foreseeable future and be supportive of domestic log demand.

    PF Olsen Log Price Index to May 2016

    The PF Olsen log price index rose two points in May to put it back at March’s $122. It is now $35 higher than its low of $87 in July 2014 and $17 above the two-year average and $19 above the five-year average.

    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 - May

    Log Grade $/tonne at mill $/JAS m3 at wharf
      May-16 Apr-16 Mar-16 Feb-16 Dec-15 May-16 Apr-16 Mar-16 Feb-16 Dec-15
    Pruned (P40) 196 196 196 195 175 195 195 198 198 195
    Structural (S30) 112 112 112 112 106          
    Structural (S20) 98 98 99 99 98          
    Export A           131 124 128 127 128
    Export K           124 118 122 120 121
    Export KI           114 106 110 108 108
    Pulp 50 50 51 51 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.

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

  • Coral Phillips reviews the changes to the IRD 2016 livestock values and assesses the implications for farmers

    By Coral Phillips*

    Last week the IRD released the National Average Market price (Herd Scheme Vales) for livestock which will be used when preparing 2016 annual financial statements.

    Dairy cow values have dropped substantially from 2015.

    On the other hand, other livestock types including dairy bulls, beef cows, beef bulls, sheep, pigs, milking goats and deer have increased from last year.

    In the last three years, from 2014 to 2016, the Herd Scheme value for Dairy cows has gone from $1,963 to $1,655 to $1,356.

    In fact, the herd scheme value of a dairy cow is now only $83 more than that for a beef cow.  Back in 2012 the value of a beef cow was $1,025 compared to $2,155 for a Friesian cow.

    This significant trend downward affects dairy farmers as their equity in livestock drops, but there are also tax consequences and cash flow implications.

    In a continuing status quo operation, if livestock is already valued on the Herd Scheme there will be no tax consequences following the decrease.

    For those dairy farmers with stock valued on National Standard Cost (NSC) there could be some major decisions to make regarding the possibility of changing valuation methods.  If the NSC value is close to the current Herd Scheme value, this could be a good time to change as the tax implications will be minimal.  Livestock can be transferred from NSC to Herd Scheme at any time as long as IRD is notified of the change.  As the reverse is no longer possible, if thinking of changing valuation methods, the strategy must be well thought out for the long term.

     For farmers ceasing ownership of livestock there could be significant tax implications exaggerated by the large decrease in values this year.  Also very important is whether the farmer retains any livestock at all, because this could influence which years Herd Scheme values are used in the tax calculation at disposal.

    Also, if thinking of selling the herd in the next few years this could be a good time to switch to the Herd Scheme.  Potentially, values will have increased by then and even if the change now results in a small amount of taxable profit, this is likely to be offset by 2016 operating losses, as well as resulting in less taxable profit at the time of sale.

    This is a similar scenario to last year, but will the values drop any further?  No one will know if we are at the bottom of the trough until we are climbing out the other side.  However, we do have until 31 March 2017 to make the decision, the deadline for filing the 2016 tax returns.

    The final 2016 provisional tax payment for May balance date farmers is on the 28th June.  As 2016 has brought a drop in income for most dairy farmers, a review is needed before then of the financial situation.  If tax is paid according to what the Inland Revenue are expecting it is likely that is will be overpaid.

    Every farmer’s situation is different, and this is a complex area.  Ensure you get the best financial advice available or the consequences could be substantial.


    Coral Phillips is an associate at CooperAitken Ltd, accountants in Morrinsville and Matamata. You can contact her here.

  • Keith Woodford says to reduce our risks from a highly volatile product, we are going to have to restructure our dairy industry. It won't be easy

    We need China more than ever for our one-trick dairy strategy

    By Keith Woodford*

    In New Zealand, we have yet to come to terms with the reality that the future of our dairy industry is highly dependent on China.

    America does not need us. Europe does not need us. The oil producing countries can no longer afford us. Africa has never been able to afford us.

    So it is all about Asia.

    Our dairy products can have a place in many Asian countries – Thailand, Singapore, Malaysia, the Philippines, Sri Lanka, Vietnam, Korea, Japan, and so on. All of these countries can and will make a difference to overall demand.   But without China, it won’t be enough.

    Further west, Iran my well open up, particularly if oil prices recover. India is the other big one, but for the foreseeable future, India will largely meet its own needs.

    In the past, our dairy industry has benefited greatly from high oil prices. This sounds counter-intuitive, but for the last ten years, apart from China, it has largely been the oil-producing countries who were out there using their oil income to buy milk powder.  There has been a remarkable correlation over this period between oil prices and milk powder prices.


    There were even a couple of years when oil-producing Venezuela was our largest purchaser of whole milk powder (WMP). But Venezuela is now in turmoil and any recovery will be slow.

    So the key reality, is that regardless of what happens elsewhere, and even with an oil rebound, the numbers can never stack up without China in the mix.

    The idea that China ever left the market is considerably misplaced. The 2015 calendar year was indeed a quiet one for China’s milk powder imports, with whole milk powder imports declining to 347,000 tonnes after purchasing 619,000 tonnes in 2013 and 671,000 tonnes in 2014.  Nearly all of this WMP came from New Zealand.

    Despite this step back, China was still by far the largest importer of WMP in 2015. Next came Algeria with 210,000 tonnes, much of it purchased from the adjacent EU.

    Algeria tends to be a buyer that comes in and out of the market, buying mainly when prices are low. However, in the early months of 2016, and despite low dairy prices, it seems that Algeria is largely absent from the market.  Algeria’s problem is the same as other oil and gas-producing countries – they no longer have the cash flow needed to purchase WMP.

    In the last few days, the EU Milk Observatory has published global import and export data for the first three months of this calendar year. What is evident, is that China’s WMP and SMP (skim milk powder) imports are recovering, although there is still some way to go to reach the 2013 and 2014 figures. So far, WMP volumes are up 24 % and SMP volumes are up 29% on the same three months last year.

    A key note of caution is that although China’s milk powder imports are increasing again, the increases are lower than for most other dairy products. There is emerging evidence that WMP will be a declining component of the Chinese dairy industry in future.

    For example, latest statistics from industry analyst CLAL in Italy depict how liquid milk consumption per capita in China increased 9% between 2013 and 2015. However, milk powder consumption per capita dropped 17% during this same two-year period. Over a longer five-year period, liquid milk consumption per capita is up 35% but WMP consumption has essentially been static.

    Over the most recent two-year period from 2013 to 2015, China’s cheese imports increased 60%, butter imports increased 36%, infant formula imports increased 57% and liquid milk imports increased 150%.   It was only WMP and SMP that went down.

    So far this year, China’s liquid milk imports (mainly UHT) are running at 80% up on the same months last year.

    In 2015, China’s largest category of dairy imports was whey at 436,000 tonnes. This largely comes from the world’s big cheese producing regions, these being Europe and the USA.

    The final destination of all this whey powder is unclear. Some will be for human consumption, and some will be ‘sweet whey’ containing a mix of whey and lactose, which probably ends up in animal feeds.

     One of the interesting statistics is imports of pure lactose. The most recent statistics for the first three months of this year show that China is only number two for lactose imports.

    So who beats China on lactose imports?  The answer is good old New Zealand!

    So why do we import so much lactose into New Zealand? The answer is that our cows produce milk in which lactose is a lower proportion than the international standard. So each year we import up to 100,000 tonne of lactose, largely from Europe and the USA, which we then mix in with our NZ-made milk powder.

    Lactose is typically one of the lower value components of milk powder. So not only does its importation to New Zealand give us an internationally standardised product; it also bulks-up the milk powder and hence is a nice money-making venture.

    Within the trade, the presence of imported lactose in New Zealand milk powder is no real secret. However, it is an issue to be thought about by those who argue that we could get more mileage from our so-called grass-fed products.

    Turning back to China, the overall evidence is very clear that China’s demand for imported dairy products is increasing.  However, the future demand for WMP is less certain.   If China does want more WMP in future, then it will be following a pathway different to other countries that have travelled from a ‘developing’ to a ‘developed’ economy.

    A big part of the equation is working out how much milk can China produce for itself.  The answer is that China struggles to produce the feed for its growing herds. Hence, milk production over there is expensive.

    If it were just a case of simple economics, then China would import much or even most of its dairy products. But these things never come down to simple economics. Food security, plus the politics and welfare of rural development, also come into the equation.

    In a simple world of open borders and totally free trade, then China would import most of its cheese and butter.  It would also import much of its UHT (long life) milk. And with emerging technologies for extended shelf life (ESL) refrigerated milk, it would also import increasing quantities of ‘fresh milk’.  In that simple world, as internal chilled facilities improve, the demand for both local and imported WMP could be expected to decline.

    Estimates of the proportion of China’s dairy consumption that is currently imported depend, to a considerable extent, as to how the imported whey is allocated between human and animal uses. However, as a working number, I estimate that total dairy imports for human use are about 15% of total liquid milk equivalent (LME) consumption. My expectation is that this will increase. But in reality we don’t have quality ‘on the ground’ research to make sound estimates of what is happening to China’s overall industry.

    So how should we be responding in New Zealand?

    The first point on which agreement should be easy to obtain – if logic is the basis of our judgements – is that we cannot have a vibrant dairy industry without China. The second point of agreement –although I have not had time to develop this argument here – should be that wholesale conversion of New Zealand’s dairy land back to sheep and beef cattle is no solution. It is very easy to show that the economics of that do not stack up.

    The challenge we face in New Zealand is that over the last 15 years we have developed an industry that is highly dependent on WMP. This is a very different industry than the butter and cheese-dominated industry that we had throughout the 20th century.

    Since the turn of the century, the WMP strategy has worked very nicely for us until the last two years, built on oil-funded purchases by the oil producing countries, combined with the unique trajectory of China’s economic growth.

    There was a very good reason why we went the WMP way. Quite simply, for a seasonal industry that produces most of its product in spring and early summer, and given the price signals of the time, it was an apparently obvious way to go.  Seasonal production and WMP go hand in glove.

    But what we have is a one-trick pony. To take an analogy from another industry, we have nearly all of our dairy eggs in the same basket.

    If we want to reduce our risks from a highly volatile product, then we are going to have to restructure our industry. Unfortunately, our industry has yet to come to terms with what that means. It won’t be an easy journey.

    Keith Woodford is Professor of Agri-Food Systems (Honorary) at Lincoln University and a Senior Fellow (Honorary) of the NZ Contemporary China Research Centre. His archived writings are at

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