By Keith Woodford*
Synlait’s Akarola is about to transform China’s infant formula market.
Fonterra’s new partner Beingmate, and all the other marketers of infant formula, are in for a huge shakeup.
On 25 March of this year I foreshadowed that infant formula prices in China were about to becoe much more competitive.
I based my report on information from dairy industry sources within China that New Hope Nutritionals – owned 75% by China’s New Hope and 25% by New Zealand’s Synlait - was about to launch a new brand of New Zealand- made infant formula called Akarola.
I reported that the new brand would be sold exclusively online, at prices much less than half of normal prices in China.
A few days later New Hope Nutritionals launched their online campaign on JD.com.
The price that I foreshadowed of 99 RMB for a 900 g per can was indeed correct. In New Zealand dollars, this is about $21, or $16 in American dollars.
In itself, there is nothing remarkable about selling infant formula at this price. It is a price that is broadly in line with international prices.
But it is a price that is totally out of line with what has been happening in China.
For the last few years, Chinese consumers have been paying several times the normal international infant formula prices. Brand owners, distributors, and retailers have all been making a killing.
It has been a crazy scene.
In 2012 and 2013 it was possible to buy infant formula at retail prices in New Zealand, Australia and the UK, then ship it to China, and still make a huge profit. There were also more than 100 brands – some have suggested over 400 brands – that were coming out of two Auckland factories.
The Chinese have tried to bring order to the market in various ways. First, in 2013 many of the large dairy companies, including Fonterra, were fined for alleged price collusion. And then in 2014, new laws were put in place requiring all brand owners to meet stringent standards of documentation and certification relating to food safety.
Those new rules have quickly sorted out most of the fly-by-night brigade. Within parts of the New Zealand media there was considerable anguish, based on a false assumption that it was all some Chinese conspiracy to block legitimate New Zealand companies. However, it was something that had to be done.
What New Hope and Synlait are now doing is the next stage in a major revolution.
This time everyone else marketing infant formula in China will be very concerned.
In marketing terms, the News Hope and Synlait strategy is a disruptive behaviour.
It is changing the rules of the game.
New Hope is telling Chinese mums and dads that they have been getting ripped off.
On JD.com they are showing what infant formula sells for in other parts of the world, and comparing that to the crazy prices in China.
New Hope and Synlait’s online presentation comparing international retail prices for infant formula. The big message is why should English mums buy infant formula at 89 RMB, Dutch mums at 90 RMB, and Canadian mums at 105 RMB, while Chinese mums pay about four times this price?
They are telling the mums and dads that they can now have the same quality product from the green pastures of New Zealand, and saying there is total traceability back to the Synlait factory on each individual can.
The story is illustrated with pictures of Canterbury pastures and snow clad Mt Hutt.
Linking Akarola back to Synlait’s Canterbury production base.
New Hope is a huge Chinese agri-food conglomerate headquartered in Chengdu.
It totally dwarfs a company like Fonterra. And it has the financial resources to make a play which others can only dream of.
New Hope has figured out that it can still make a nice profit at these much reduced prices, as long as it can build market share. They know that about 40% of infant formula purchases are already made online and that this is increasing rapidly. So the key to success will be getting sufficient supply from Synlait.
Within days of the product launch on JD.com, the existing supplies ran out and currently there is still no more supply available.
Over the next few months, they may well struggle from an ongoing shortage.
However, as Synlait’s third dryer comes on stream in September, with specialist infant formula capacity, those supply issues should be attended to.
That new Synlait dryer has a yearly capacity to provide 50,000 tonnes of product per annum, which is 55 million cans of formula !
The classic analogy for a market disruptive strategy is Henry Ford and the Model T car. It wasn’t Henry who first invented a car. And initially the invention of the car did not in itself threaten horse drawn carriages. But once Henry Ford introduced the Model T in 1908 at a price that millions could afford, the world did indeed change. There was no going back.
Chinese dairy company Yashili, which uses only New Zealand dairy products in its infant formulas, has now responded by saying that from May it too will sell its infant formula online to Chinese mums and dads for a similar price. The final price has yet to be confirmed, but it will be no more than 108 RMB.
Now that the ball is rolling, others will have to follow suit.
It may take a while, but the outcome is inevitable:
Chinese infant formula prices are going to come down to international levels.
I am already getting mail from some industry players saying that this is going to be a disaster for New Zealand. But I don’t think that is necessarily so.
The middle men have been the ones soaking up all of the profits.
The supply chains into baby shops – where most infant formula s sold - will now have to become much more efficient to compete with online sales.
But there is a lesson here for all New Zealand agri-food suppliers into China: if you aren’t selling online then you are going to end up missing in action.
China is different and online is where all the action is.
New Zealand and Synlait linked to China on JD.com
Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. He will be writing a regular column here. His archived writings are available at http://keithwoodford.wordpress.com
For most farmers the end of the financial year is fast approaching.
The following are some points to consider prior to 31 May 2015:
► Fixed Assets
Obtain your fixed assets schedule from your accountant, and review and record any assets that can be written-off if they have become obsolete or are no longer used. This will ensure your assets register is up to date. Any assets written- off will create an expense against taxable income.
► Feed Supplements on hand
Your unused feed supplements at 31 May need to be considered. If the supplements you have on hand cost you in excess of $58,000, they need to be claimed in the following year. This is because the feed has not been used and therefore the expenditure has not been incurred in deriving income in the current year.
► Repairs & Maintenance
If you are planning on carrying out any maintenance or repairs around the farm, you may consider completing these prior to 31 May to claim these as an expense in the current year.
► Bad Debtors
If you have any debtors that you do not expect to receive payment from they should be written- off. These bad debts will be claimed as a deduction to reduce income
► Employee Costs
Any employee costs such as holiday pay, accrued wages and bonuses that will be paid out in the 63 days after 31 May can be claimed as an expense in the current financial year.
► Donations Rebate
For donations you have made during the financial year you can claim 33% of the total donations or 33% of your taxable income whichever is the lesser amount. Companies that have a taxable loss will not be able to claim any donations as expenses.
► Livestock Numbers
Record the livestock you have on hand at 31 May to ensure correct numbers are valued as closing stock in your financial statements.
Reviewing these points may help you save money.
Ensuring your information is current and accurate will help you to make more timely decisions about the future of your business.
You’ve probably seen this advertised.
You might remember the law was changed in 2013 to allow Anzac day and Waitangi day to be moved to a Monday if they fall on a weekend.
This year’s Anzac day will be the first affected – but what does Mondayising really mean for you as a rural employer?
In reality for most farm staff – not much.
Why? Well here’s what the law states re this ...
If the holiday falls on a Saturday or Sunday and that day would not otherwise be a working day for the employee, the holiday is transferred to the following Monday or Tuesday so that the employee still gets a paid day off if the employee would usually work on these days.
You only get a statutory day once.
On a farm, if Saturday is a day you usually work on, then Saturday is Anzac Day, as it falls whether you still work on it or have the day off.
For those people who do not usually work Saturday their Anzac holiday is moved to Monday.
What should you watch out for?
If the employee has their usual scheduled weekend off the Saturday would not be a normal working day therefore that employee will need to be Mondayised so that the employee receives the benefit of that statutory day. Note this refers to their regular weekend off and not being on annual leave in which case they would get the statutory day off and use one less day of annual leave for their break.
If any employee works on Anzac Day (even for a short time) please remember that you need to keep an accurate record of how long each employee actually works that day as they are entitled to be paid at time and a half in addition to a day in lieu (so long as the Saturday was a day that they would usually work).
Of course the growing use of Time-Sheets will help make this easier to keep track of.
Some analysts are coming to the view that dairy commodity prices might start rising later in the year.
ANZ, Danone, and Rabobank have all recently opined that a turn in prospects may be due.
Their views come even though the early 2015 boost proved temporary and has been followed by another sharp downturn.
ANZ said that, for the second quarter "any sharp recovery in dairy prices looks unlikely", citing "cautious sentiment" among buyers who seem to be well stocked.
"Many buyers appear to have disappeared from the market," ANZ said.
"With adequate [supply] cover, they can afford to take a wait and see approach," they said.
The removal of European Union milk production quotas this month would spur a rise in the region's output and cast further questions over any upturn.
But ANZ also noted current prices are above the low levels we saw in late 2014 in the GlobalDairyTrade auctions. These slightly higher levels are despite Fonterra adding some modest volumes to the auction offer levels.
In fact they go on to say "by the second half of 2015, more upward momentum for whole milk powder prices is likely to take hold as global inventories fall."
They think values for whole milk powder are "forecast to trade higher in the second half of 2015".
They see lower farmgate milk prices in other exporting countries "start to bite ... slowing supply and helping rebalance the dairy market".
Chinese demand to return
French dairy giant Danone also thinks prices will recover later this year, and they also think it will be a return of China demand that will spur the change.
"The recent evolution of supply and demand is still showing that there would be a rebound between the third-fourth quarters and the beginning of next year," Cecile Cabanis, the Danone finance director is reported to have said.
"We expect that the Chinese imports will start again, and they will create more pressure on demand, hence have an impact on prices," Cabanis said.
Rabobank last month forecast price "will start to rise from the third quarter, gaining more momentum in the October-to-December period". Rabobank's change in tone was the first to sniff out a coming rise in prices.
Three analysts views in themselves won't turn any markets but all are astute observers.
Price improvements in the October quarter won't come in time to 'save' the 2015/16 Fonterra payout level or payout levels for any other dairy company.
But the prospects of improving prices on the horizon should help the dairy industry with the knowledge that better prices are a realistic possibility within the next year.
Dairy farm sales retreated in the three months to March, with both the number of sales and median price per hectare down compared to the three months to February.
Real Estate Institute of New Zealand figures show there were 86 dairy farm sales in the three months to March at a median price per hectare of $37,761, compared with 97 sales in the three months to February at a median price per hectare of $45,105.
However although the number of sales in the year to March was well down on the same period a year earlier, when 102 dairy farms were sold, the median price per hectare was still up on a year earlier when it was $34,474.
The drop in the median price between February and March appears to have been driven by sales in Otago and Southland, with both regions recording substantial falls in median prices per hectare compared to the three months to February, with prices per hectare in all other regions showing gains over the same period.
The REINZ Dairy Farm Price Index, which adjusts for differences in farm size and location, dropped 2% in the three months to March compared to the three months to February, but was up 14.3% for the year.
"The reduced dairy payout and the high New Zealand dollar are being carefully assessed by prudent purchasers, and the drought conditions in particular have had a negative impact on some regions in the South Island," REINZ rural spokesman Brian Peacocke said.
Overall there were 425 farm sales of all types in the three months to March, compared to 472 in the thee months to March last year.
The median price per hectare for all farm types was $27,957, up 25% on the median price per hectare for the three months to March last year.
Peacock said the general tone of the market had been very solid, with demand ensuring that good quality properties sold extremely well.
Grazing properties accounted for the lion's share of sales (42%) in the three months to March, followed by dairy (20%) finishing farms (15%), and horticulture (13%).
To read the full REINZ rural market report for all farm types and all regions, click on the following link:
More details can be found here.
By Bernard Hickey
Reserve Bank Assistant Governor John McDermott has delivered a speech on the inflation outlook and monetary policy that talked in more detail about the conditions that might force the Reserve Bank to cut the Official Cash Rate.
McDermott told the Waikato Chamber of Commerce and Industry and the Waikato branch of the Institute of Directors in Hamilton that the Reserve Bank would ensure monetary policy remained stimulatory to support growth above its potential, "to help lift inflation back to target."
The tone of his comments are more dovish than those made by Governor Graeme Wheeler on March 12. Since then inflation data has shown annual inflation of 0.1% in the year to March, which is well below the Reserve Bank's 1-3% target band, and the New Zealand dollar has risen 4% on a Trade Weighted Index basis.
McDermott said in the speech titled "The dragon slain? Near zero inflation in New Zealand" that the near-zero inflation rate was mostly due to low tradables inflation, caused by the slow global economic recovery, the high exchange rate, and the recent sharp falls in oil prices.
"Is this another slain dragon?" he asked about the low inflation currently. "I do not believe so; the dragon is merely sleeping," he said.
McDermott said there was little the bank could do in the short term to influence inflation and some of the factors would prove temporary, including lower oil prices.
“At present, the Bank is not considering any increase in interest rates," McDermott said, echoing the formal outlook adopted on March 12, but the commentary around that was more conciliatory towards rate cuts, and less aggressive about rate hikes.
"Before considering any tightening in monetary policy we would need to be confident that increased capacity utilisation and labour market tightness was generating, or about to generate, a substantial increase in inflation," he said.
“Evidence of weakening demand and domestic inflationary pressures would prompt us to consider lowering interest rates. There are some areas of uncertainty surrounding the outlook for capacity pressures, including the lingering effects of the recent drought in parts of the country, fiscal consolidation, lower dairy incomes and the impact of the exchange rate on export and import substitution industries."
McDermott said the bank was also assessing the outlook for tradables inflation that is being dampened by global conditions and the high exchange rate.
"The fact that the exchange rate has appreciated while our key export prices, such as dairy, have been falling, is unwelcome," he added.
The bank remained vigilant in watching wage bargaining and price-setting outcomes.
"Should these settle at levels lower than our target range for inflation, it would be appropriate to ease policy," he said, adding future adjustments in the OCR would depend on the evolution of inflationary pressures in both the traded and non-traded sectors.
Flatter Phillips Curve?
McDermott went on to discuss whether the Phillips curve, which looks at how inflation pressures pick up as the amount of spare capacity in the economy reduces. The size of the 'output gap', which measures the speed of economic growth above or below the economy's potential output, is a key determinant of the direction of longer term inflation. McDermott said the output gap was currently positive at around half a percent of potential output.
"Monetary policy is currently supportive, which should help to drive the output gap higher in coming quarters and generate the additional inflation to return to the target midpoint," he said.
However, the bank had noticed some indicators, including unemployment, were consistent with a negative output gap and hence lower inflationary pressure.
"The subdued nature of the actual increase in domestic inflationary pressure raises the question of whether the output gap is having a smaller influence on actual inflation than it has in the past. In other words, has the slope of the Phillips curve become flatter?," he asked.
The anchoring of inflation at low levels represented a success for New Zealand's monetary policy framework, but was also a challenge.
"With a flat Phillips curve it becomes more difficult for the Reserve Bank to influence inflation by affecting the demand for resources and the size of the output gap," McDermott said.
"The current flatter Phillips curve could mean that the positive output gap is exerting less inflationary pressure than we currently believe, slowing our eventual return to target midpoint," he said.
Watching inflation expectations
McDermott then pointed to falling inflation expectations and that the wage setting and price setting behaviour was closely linked to current and past inflation experiences, rather than future expectations.
"If price and wage setting is very backward looking, the temporarily low headline inflation from falling petrol prices could become more widely entrenched," he said.
Longer term measures of expectations were currently consistent with the mid-point of the Reserve Bank's 1-3% target, but market based measures had fallen sharply.
"The level of these other measures are consistent with inflation expectations at or just below the target midpoint of 2 percent, but all highlight the downward direction over the past year," he said.
ASB Chief Economist Nick Tuffley said the speech did not indicate any change in the Reserve Bank's approach, but reinforced the risks of a change were more for a cut than a hike. Tuffley saw a 25% chance of a cut this year.
"The RBNZ doesn’t have a lot of leeway left with its inflation target: if a return to the 2% inflation target mid-point came under question then a lower OCR has a green light," Tuffley said, pointing in particular to the bank's comments about the 'unwelcome' rise in the New Zealand dollar despite falling dairy prices.
"We see the NZD as the more immediate catalyst for an OCR cut, particularly if it was to lift further and materially change the inflation outlook," he said.
Westpac Chief Economist Dominick Stephens said his first impression was the speech was more dovish.
"The case for rate cuts was more fleshed out," Stephens said.
"As well as the risk of consumers and businesses falling into a low-inflation mindset, the speech noted that signs of weaker domestic demand and inflation pressures could prompt a cut," he said.
"This included a menu of factors that are already on the horizon - drought, low dairy prices, fiscal consolidation, and the high exchange rate."
Stephens said the Reserve Bank could scratch the 'up' part of the 'up or down' phrase from its monetary policy statement when it next announces its decision on April 30.
(Updated with more details, reaction)
When we think of the Heartland we conjure up images of the rough and ready can-do farmer striding across the high country.
But the farmer of the Heartland is not confined to this image.
Farming in the Heartland is a technically challenging career. I am in constant awe of my fellow farmer, who every day must make complex decisions, dealing with the vagaries of weather, biology and the market.
Like me, my grandfather also came to farming from medicine and for the rest of his life found incredible satisfaction in the scientific challenge farming brings.
The Heartland has contributed enormously to New Zealand and our development as a country.
This month we commemorate 100 years since New Zealand’s recognised baptism of fire.
Farmers contributed their horses and their sons to the war effort. Almost every horse and many of our men never returned. Back in New Zealand the production of food and fibre had to continue apace. We remember the past but we also must look to the future. The future of the Heartland.
Today I want to reflect on the contribution science and innovation makes to agriculture.
I want to traverse some of the issues that are concerning Federated Farmers and I want to give some reassurance that, not only does the Heartland have a future, but New Zealand’s future depends on the Heartland; and that future is bright.
We live in a global world. We are part of its problems and we are part of the solution.
Every three weeks the world population grows by 1 New Zealand – 4 and a half million people.
Because birth rates in Africa are still climbing the latest UN projections have the population peaking at almost 11 billion by the turn of the century. The Food and Agriculture Organisation estimates that agricultural output must increase by 60 percent by 2050 to meet this growth. That means the amount of land available for agriculture to feed each person on the planet will shrink so that while in 1960 one hectare was needed to feed two people, by 2050 one hectare will be needed to feed six people – a three-fold change in less than a century.
New Zealand cannot feed the world, but we must play our part.
It would be irresponsible of us to squander or underutilise our resources.
The green revolution in the last half of the 20th century gave us spectacular increases in productivity and production. This was through the use of pesticides, fertilisers and modern hybrids. But these techniques on their own will not be enough, nor will they necessarily satisfy the requirement to reduce our environmental footprint.
We have just heard about biological farming but there are many forms of farming and they, in my view, fit across an overlapping spectrum.
At one end there is organics. But there is also integrated pest management, conventional agriculture, no-till techniques, conservation agriculture and modern biotechnology - including genetic modification and the newer gene editing techniques.
We can and we should learn from each of these techniques and understand the contribution each can make but at the heart of our progression as farmers is the scientific method.
Science is not a fundamentalist world view, immobile to change. It is not common sense - after all it was once considered common sense that the sun revolved around the earth.
Science is a methodology. It is about postulating hypotheses and then trying to prove those hypotheses are wrong.
Like evolution, only the strongest survive.
We must put our assumptions to the scientific test. We must discard those assumptions which science shows to be wrong and we must be honest about the expectations of the farming methods we choose. Farming becomes a fundamentalist religion if we cling to our assumptions in spite of the evidence.
To ensure we have an honest debate – be it about climate change, health and safety, genetic modification or water quality - we need a public who are science literate.
It has concerned me that science is not valued or understood in society. However we are seeing glimmers of hope. Led by the Prime Minister’s Chief Science Advisor, the government is taking public science literacy seriously and agriculture will ride on its coat tails.
In the public discourse on fluoridation, immunisation and 1080 we are seeing the public starting to back science and reject the worn out and unsupported rhetoric of the anti-science campaigners.
In the debate and science of genetics, the world is thundering past us.
But there are signs the much needed discussion and reconciliation with science is happening. The editorial of this month’s North and South profiled the role of the fanatic and asked “Is GM the bogey man of our time?” It said “Unless I’ve missed a report on killer frankenchips, global deaths from genetically modified food are, to date, zero.”
The editorial ended on this quote from Bertrand Russell: “The whole problem with the world is that fools and fanatics are so certain of themselves but wiser people are so full of doubt”.
Doubt reflects a healthy scepticism which is critical to the scientific process. Science also requires we use all the facts at our disposal, not pick and choose those which suit our view.
If we are to see our Heartland prosper we must avail ourselves of all the tools of modern science and technology. We have been world leaders in agriculture because we have been doing just that – we didn’t invent fertilisers but we adapted the science to our own situation – this is the strength of our innovation.
So we are encouraged to hear that the government is to increase research and development support to businesses by 80-million-dollars and we recognise that science is the only portfolio which has seen increases year on year through this period of government austerity.
Prior to the election Federated Farmers called for an increase in R&D spending of 600-million per year to bring us up to OECD levels. This year’s announcement falls well short of the mark and it also fails to address the chronic underfunding of basic research and critical capability, but it is a step in the right direction and we hope there is more to come.
We must continue to remind politicians where our strength as a country lies – and that strength is in biology. The digital revolution is upon us. The democratization of biology is just around the corner. We must invest in our digital future in addition to investing in biology - not instead of investing in biology.
Biology, and by that I mean agriculture, is rooted in the land and, as the cliché goes, you can’t take it with you. So while innovations based on biology may take longer to develop they are rooted here to the land and deployed here in the Heartland.
Our digital future will increase our productivity and help us reduce our environmental footprint as you have heard from Craig and Roz. But we need the infrastructure to support it – we need good connectivity and we need it fast if we are to realise our potential.
North Canterbury remains the driest part of the country this year. We in South Canterbury have had some relief in recent weeks, but one look at the landscape here confirms that it has not reached this far north.
I am told rivers that have flowed for most if not all of the past hundred years are now dry.
If the predictions of more frequent future droughts are true then we must all build a greater resilience into our farming operations.
I know that is of little comfort to farmers here, and wider afield to the south, who are struggling to get through to spring growth.
If there is one message I have here, then it is to talk to people who can help and plan ahead and prepare. Look after each other.
Longer term, water storage remains at the top of Federated Farmers’ agenda.
Water storage builds resilience – economic resilience, community resilience and environmental resilience. Water ownership has been a hot debate over the past week, and to a great extent, that is a debate for the government to have with iwi and the public.
But I make some observations:
Ownership of water should not be confused with governance. If it is, there is a risk that self-interest will get in the way of good governance decisions.
Secondly, any solution should not create a further grievance – in this case a grievance with farmers.
- Third, there should be one system for all. Perpetual ownership by one group, and short term rights for the rest, is not a recipe for simplicity, equity nor harmony.
We need cool heads if we are to get this right.
Solutions for Maori economic aspirations in water could well come through water storage. By contributing to the development of water storage, government can help create the headroom for negotiation and settlement if such settlement is justified.
And note I used the word “contribute”, not “invest”. We already have Crown Irrigation Investments to address the hurdle of early capital shortfall and this has been welcomed by Federated Farmers. But there is a case for government contributing to water storage in addition to its investment. To create headroom for negotiation as I have just said but also to reflect the contribution water storage makes to the environment and the community.
Farmers are willing to pay for the benefit they receive from water storage. They do this through the market and their own commercial decisions.
But water storage also provides the opportunity to improve habitat, increase environmental flows and provide recreation. Both local and central government should also consider their financial contribution to effect these outcomes.
Equity in a resource-constrained world is hard to achieve. Like water, we can use science and technology to provide more headroom in the allocation of nitrogen emissions - a fraught topic in this part of the world in recent months.
I have two principle tests for success when it comes to allocation of nutrient emissions:
The first is that any solution must not undermine the business value of the high emitters.
- The second, and competing test, is that any solution must not undermine the land value of the low emitters.
These tests have not yet been met in the Hurunui but progress is being made.
We used these principles in South Canterbury. With strong farmer leadership and early engagement from all farmers – dryland and irrigated – we came up with a solution which was devised by farmers, which farmers saw as equitable, and who now have genuine buy into, and ownership, of the results.
We rejected grandfathering of nutrients – that is allocating emitters a property right related to their current emissions.
We also rejected equal allocation per hectare.
The final solution provided for flexibility of land use for low emitters with realistic targets for reduced emissions for high emitters.
The key though was to have all farmers working to best practice and a sinking lid on maximum emissions as best practice through science improved nitrogen retention.
Depending on the state of the catchment the nitrogen freed up can then be redistributed to farmers or allocated to the environment.
Continued environmental monitoring is critical and the system should be flexible enough to change as more information flows.
The challenge now is for the regulators at Environment Canterbury to translate these outcomes into a plan.
The government has set an aspiration to double the value of primary exports by 2025.
It is nonsense to think that we should or could do that by simply doubling production. There is headroom to increase production in some areas, and productivity can be improved. Yet the key to reaching this aspiration is through the investment in, and application of, science and innovation, to develop new products and add value to our current ones.
This is how we increase value and attract a new generation of customers who are looking for a safe and trusted source of food for them and their children. As families get smaller, people have become more risk averse for the children they have and that is reflected in the market place.
We have seen this in the Chinese response to the melamine milk scandal where precious children were put at risk. I think this response is instructive.
Consumer demand driven by ethics, environmentalism represented by fashions such as organic food will come and go. That does not mean to say there are not bottom lines. There are.
However, the basic food characteristics of quality, safety, integrity and value are here for the long term and are the real influencers of purchasing decisions over the long term. These characteristics depend on science and good communication - not hype.
Our reputation has been hard earned. It is reflected in the muted consumer response here and overseas to the recent 1080 threats, which could have escalated into a serious trade issue. It was not our self-characterised clean and green image which got us across the line but our reputation in the market place for honesty and integrity.
Implicit in that was good communication and the application of science and evidence such as ensuring supply chain security and implementing testing regimes. So, this case just serves to illustrate that at quite different levels, science and technology has a vital role in our agriculture success.
Let us combine those tools of science we have in this country, with the natural resilience, skills and commitment of our Heartland farmers.
The world has limited resources to feed and sustain a burgeoning population. We have favourable climate, good soils and plentiful water. That makes us the lucky country.
Let us not squander those resources by leaving the heavy lifting to other countries and other communities. We have a part to play and a leadership role in this space. Our leadership is driven from the Heartland, our future lies in the Heartland and the future of the Heartland is bright.
William Rolleston is the President of Federated Farmers. This was a speech delivered to the Heartland Forum, at Conway Flats in North Canterbury on 17 April 2015.
The log market diverged considerably in April as the domestic market continued its strong run and the export market softened with the Chinese New Year hang-over.
Domestic pruned prices strengthened, export pruned and domestic unpruned prices flat-lined and export unpruned log prices plunged $10-$17.
The export price drop has smothered harvesting confidence with comparisons being made to last year’s massive $60 (14%) price drop over four months.
At this stage, however, it’s premature to make such comparisons and, besides, the situation is quite different this time round (see more detail below).
Export Log Market
The widely anticipated and later-than-usual Chinese Spring Holiday resulted in log stocks in China ballooning up to levels similar to those seen early last year, just prior to the dramatic price decline.
This 'recent memory' has led to a marked increase in market uncertainty and a price drop in unpruned grades of $10-$17/JAS m3.
As reported last month, logs stocks at the 25 Chinese sea ports monitored increased to 4.00 million m3 by the end of February.
During the first week of March stocks increased to 4.20 million m3 and stayed at about that level until the last week in March when stocks crept up to 4.27m3.
This has unsettled the market and CFR price (the US$ price of logs delivered to the destination port) dropped to US$110/JAS m3 for A-grade Radiata pine logs.
Sales/offtake is relatively strong at around 65,000 JAS m3 per day, but at such high stock levels, Chinese buyers can sit on their hands and wait for prices to drop.
Log Stocks at China Sea Ports (cubic metres)
Log stocks continued to build in March with higher-than-usual deliveries from Russia and Australia, buoyed by weak currencies. Deliveries from North America have reduced considerably with the lower US$ CFR price (and no exchange rate offset). New Zealand deliveries were steady but lower sales/offtake resulted in an increase in stock levels.
China policy makers are trying to steer a delicate balance between a property bubble and deflation. A housing slump, erratic growth in exports and a state-led slowdown in investment to help restructure the Chinese economy dragged growth to 7.4% last year – a level not seen since 1990.
While the housing sector is reported to contribute about 15% of China’s economy, the multiplier effect is probably much larger.
To arrest a widespread slide in prices and sales, the government has recently cut interest rates and the reserve requirement of major banks (the minimum amount of cash banks need to hold back from lending). It is mooted that other contingency measures are being prepared should the market remain insufficiently responsive.
But with years of unsold developer inventory, it will be some time before confidence is restored in this sector.
Korea is shaping up for a better year, but is expected to remain a price-follower to China. However, strong non-China sales options will broaden log sellers options and strengthen their negotiating position:
- South Korea’s economy is expected to grow 3.2% in 2015, slightly higher than the 3.3%.
- Housing starts in 2014 were up 9.7% at 91,854 buildings compared to 2013.
- Housing permits in 2014 were up 8.9% at 101,894 buildings compared to 2013.
- The number of wood building permits and wood building starts in 2014 were up 11.5% and 11.2% compared to 2013 respectively.
- Total floor areas of wood building permits in 2014 dramatically increased 20.6% to 1.2 million m2 compared to 2013.
Ocean freight rates started to rally in the second half of March, but have weakened again in early April. This factor, in conjunction with a lower NZ$/US$ exchange rate, means that despite CFR price being lower than the lowest point of last year, NZ$ at-wharf-gate prices are faring much better. For example, A-grade troughed at $76/JAS m3 in July of last year when CFR price was US$115. Currently the NZ$ at-wharf-gate price of A-grade is $92/JAS m3 with a CFR price of US$110. This makes Radiata pine in China more competitive than North American logs.
Readers, especially those with an interest in harvesting, will be eager to understand the outlook for the rest of the year. As usual the sentiment is highly varied, ranging from the most positive being a weak May and then steady rises, to pessimistic – weak for the remainder of the year. The following three factors, if borne out, point to a more positive leaning:
1. The increased competitive position of Radiata pine logs at current in-market/CFR pricing.
2. Significant reduction in North American supply due to uneconomic CFR pricing and better domestic options.
3. Recent significant unwinding/reversing of policies previously implemented to constrain the Chinese housing market. For example, loan/value ratios on house lending are reported to have been eased from 30-40% to 60%. These should reinvigorate the housing market.
Russian log and lumber supply is still a bit of a wildcard, and we saw a large increase in supply in March stimulated by the heavily depreciated ruble.
However, just as we didn’t see much of a supply response to the removal of tariffs in 2011, there is doubt that Russia has much capacity to significantly increase its wood exports.
Domestic Log Market
Pruned logs have been in strong demand in most areas, especially in the Bay of Plenty where prices increased $7-$12/tonne in April as a part of the quarterly price setting round.
Structural log demand remains strong but with little change in price from the prior month. Continued tight supply of structural logs in the Canterbury region is keeping prices strong.
A long-standing business, Mamaku sawmill, announced closure last month citing a high exchange rate and log price and inadequate availability of pruned logs as causing it to lose money and prevent it from investing in much needed new plant and equipment. Regrettably twenty five jobs will be lost to the local community.
Winston Peters, during his recent Northland by-election, seized an opportunity to make a call for a price control on logs. While most in the industry support domestic processing in preference to exporting logs, the problem with price control is that the current average estimated rate of return on capital from forest growing of about 5-7% would be driven even lower. This would increase the rate of deforestation and eventually there wouldn’t be enough forests to supply logs for the domestic processing industry. So apart from having dubious economic rationale and major equity and fairness implications, controlling log prices would eventually be self-defeating.
Other mills appear to be experiencing buoyant trading conditions in the domestic and export wood products markets, although the high NZ$/AU$ exchange rate will be having significant adverse impact on many since Australia is still New Zealand’s largest trading partner.
The PF Olsen log price index fell seven points from $107 last month to $100 this month. It is now $15 higher than its cyclical low of $85 in November 2011 and $6 below the two-year average and $1 below the five-year average.
PF Olsen Log Price Index
Basis of Index: This Index is based on prices in the table below weighted in proportions that represent a broad average of log grades produced from a typical pruned forest with an approximate mix of 40% domestic and 60% export supply.
Indicative Average Current Log Prices
|Log Grade||$/tonne at mill||$/JAS m3 at wharf|
Note: Actual prices will vary according to regional supply/demand balances, varying cost structures and grade variation. These prices should be used as a guide only and specific advice sought for individual forests.
Autumn is providing good growing conditions in the North Island and the deep south, but the top eastern areas of the South Island continue to struggle with lack of moisture.
North Canterbury and Marlborough missed significant rain from the latest front, but instead received lower temperatures with hail and snow, and will be hoping NIWA's April/June forecast of milder conditions will arrive.
Most herds are close to drying off, and will be monitoring cows body condition scores to decide when to finish milking, and rebuild condition over the winter for the new season's calving.
Autumn cows are now supplying bobby calves to the saleyards, to strong interest from beef farmers driven by a rising demand from the US manufacturing beef market.
Milk auction prices fell again for the third consecutive event but less than the recent big drops at -3.6%, and was led down again by skim and whole milk powders whose prices are still languishing in the low to mid $2000/tonne areas.
Trading in milk futures indicated this downward trend, and future auctions will need to be very positive if the $4.70 payout is at all possible, and the new years prediction to be at sustainable levels.
Fonterra shares are falling, to now sit at $5.20, and with the dividend also predicted to be down, shareholders will be looking hard at their returns from their significant capital holdings.
The dairy giant also went to the market with a $250 million bond issue as they look to fund future corporate activities, and interest in this offer will provide some indication of the present optimism in this sector.
Two dairy analysts have publicised gloomy forecasts for next year with a "$5/kgms" forecast, citing increasing European and US production and the currency as negative drivers, but also note that low returns could curb production and cow cull kills were increasing in NZ and the US.
Goat milk production has received publicity last week with interest in the North Island, and reports a Chinese company is planning to build a goat milk powder factory in Ashburton.
There have been calls for a change to "Gypsy Day", that creates chaos on the roads, farms, and lawyers offices every year, and suggestions are that the system be planned well ahead to allow more flexibility in the changeover period.
By Allan Barber
It all seems to have gone very quiet since the release of MIE group’s report on the red meat sector last month and I’m not convinced there will be much more noise emerging from the meat companies.
Although MIE chairman John McCarthy is hopeful there will be reaction once people have had a chance to digest the report’s analysis and recommendations, none of the processors I have spoken to have given any indication they see the need to provide a response beyond what they have already said.
Essentially the report contains a comprehensive analysis of the industry’s slaughter volumes and processing costs with the calculation of capacity usage and a recommended ‘ideal’ plant configuration.
This analysis leads to a series of recommendations which are actually a wish list of things MIE would like to happen, but has no power to implement.
Pleas for government intervention and farmer support by way of contracted supply and financial commitment to capital raising are just pious hopes, because they won’t happen; not at all in the case of legislation and to a lesser extent than necessary in the case of farmer commitment.
For the government to be willing to legislate, the meat companies would have to agree on a solution such as tradable slaughter rights or chain licensing, but there appears to be no chance of either option being acceptable to a sufficient majority of companies.
When TSRs were first proposed in 2012, three of the large companies were in agreement on the formula, but AFFCO wanted a substantially different basis of calculation.
The concept of chain licensing only appeals to one of the big four, partly because it would take too long to have any tangible effect and partly because it would stifle innovation.
Alliance chairman Murray Taggart agrees there is overcapacity, but not as much as stated in the report which is a similar position to SFF’s chairman Rob Hewett’s view. Taggart also acknowledges there can and should be improvements and believes the companies, at least the cooperatives, share MIE’s goals. But in his firm opinion the pathway to improvement is a commercial one, highly dependent on farmer behaviour which ‘hasn’t changed for thousands of years.’
Taggart also maintains returns from sheep farming have not been lower than dairy since the early 2000s with obvious exceptions like the huge milk payout spike last season which now seems like an aberration, not a long term trend.
In relation to TSRs Sir Graeme Harrison, ANZCO’s chairman, expressed the opinion they would be a means to achieving a transition, as long as their application was for a limited period, but asked the question ‘who is paying for the scheme?’ If farmers want to acquire the meat industry, they must put their money where their mouth is, but quoting an industry executive from some years ago Harrison said ‘farmers like to socialise their losses and capitalise their gains.’
Although all the large companies could see the logic of a scheme such as TSRs or chain licensing, they see little probability of finding an agreed solution and consequently little chance of the government going down the track of legislation. They were all philosophically opposed to the principle of calling in the government to solve the industry’s problems.
AFFCO’s Sam Lewis said as a farmer he personally wouldn’t favour either TSRs or chain licensing, preferring to retain freedom of choice and questioned whether the solution being demanded by MIE was actually necessary. While acknowledging the need for capacity reduction, he pointed to the huge developments in meeting consumer needs and adapting to changing market dynamics by the meat exporters in the last 25 years. He cited the chilled lamb trade as a real success story and the emergence of China as an important market for beef and sheepmeat.
Judging by the response of the company chairmen canvassed, MIE’s recommendations are unlikely to gain traction and the group will struggle to exert any influence without power to effect change. It is probable MIE will go the same way as other groups such as MIAG that have tried to drive industry restructure or merger of the two cooperatives.
If MIE’s campaign for reform is to continue, farmers need to digest the recommendations in the report and decide whether they see benefits in changing their supply commitments or their level of investment in the industry. They may well decide sheep and beef farming is a sector which doesn’t provide them with an adequate return, but the alternatives will also carry risk.
Ultimately they have a number of choices: which type of farming best meets their objectives, how much to invest in lifting their farm performance, what they are prepared to contribute to driving industry change and the level of contractual commitment they are willing to make.
The likely outcome of this latest meat industry report is an evolutionary rather than revolutionary change in structure, as meat companies assess their returns on capital, while simultaneously farmers will review their individual situation. As has always been the case farmer behaviour will be the most important factor in determining the future of their industry.
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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he runs a boutique B&B with his wife. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at email@example.com or read his blog here ». This article was first published in Farmers Weekly. It is here with permission.