Rural

  • Allan Barber reviews ANZ's assessment of the "ample opportunities" in the wider Asian markets for products from our primary sectors and finds plenty of reasons to be positive

    By Allan Barber*

    While sheep and beef farmers are questioning whether they will ever receive the returns they need, there is potentially considerable hope for the future.

    The changing demographics and spheres of global influence indicate a substantial change in the relative economic power of the markets with which we trade.

    The ANZ Bank’s June report focuses on new horizons in Asia, highlighting the top six countries we already trade with, representing 80% of New Zealand’s bilateral trade with Asia, and a second division of up and coming prospects. The report’s focus on Asia means our trade with the rest of the world is excluded from the analysis, but it provides a timely reminder of the opportunities available in markets not previously seen as easy or possible to develop.

    These opportunities are further underlined by the Regional Comprehensive Economic Partnership negotiations held recently in Auckland involving 16 Asian countries which importantly include India. This group of countries includes China and otherwise largely mimics the signatories to the TPP with the important exception of the USA, but it is intended there won’t be the same level of secrecy with RCEP, nor will it have to run the gauntlet of the American House of Representatives.

    RCEP also complements New Zealand’s existing FTAs in Asia, as it embraces ASEAN and the six countries with which ASEAN has negotiated FTAs. It currently comprises 45% of the world’s population and 40% of world trade, although both these figures will inevitably increase in the future.

    ANZ’s report rates the top six markets on several dimensions – Singapore, Hong Kong, Japan, South Korea, Taiwan, Malaysia and China – and New Zealand exporters have targeted them very well. However the report lists another nine countries in particular that meet the requirements for future assessment and development - Thailand, Indonesia, Mongolia, Philippines, Vietnam, Brunei Darussalam, Armenia, Azerbaijan, and Kazakhstan. Some of these, notably the first five, are already being developed.

    Each market has its pros and cons with some being fast-growing on a number of fronts, highlighting rapid growth of new opportunities, while others are more mature, but offer growth opportunities if market penetration and share can be increased. Others represent large opportunities, but have a number of barriers that would need navigating. Indonesia is one such market with its inconsistent approach to self-sufficiency.

    In his introduction ANZ Chief Economist Cameron Bagrie lists a number of factors to be considered by any company wishing to develop new markets in Asia, although these hold equally true for other parts of the world. His key points are strong business relationships built up over time and based on mutual trust; intimate knowledge of a targeted market segment; cultural understanding of tastes and business practices, local staff or collaborators, recognition of market size, and above all patience and a long-term view of the time, cost and effort required to become truly established.

    If current trends are a true indication of performance, New Zealand exporters are already moving at an appropriate pace to develop business in the best markets and will continue to invest in new market development. The big questions are how and whether this can be done better or faster.

    The red meat industry is particularly sensitive to a range of factors, such as market access, seasonality, exchange rates and the robustness of the cool chain. Beside these sits demand which fluctuates according to the economic conditions in each market. There is a limit to what New Zealand, as the exporting country, can do about any of these, especially in isolation.

    However what we must do is to ensure our product hits four Ps (and one D) absolutely spot on: it must be produced, processed, packaged, promoted and distributed to the best standards of quality and efficiency for each selected market destination and end use, whether for retail, food service or manufacturing use.

    Agricultural envoy Mike Petersen has been pushing or in his own words ‘banging on about’ the need for a coherent global story to take to the world, but makes the frustrated point we are lagging behind many other countries. He cites Ireland’s Origin Green campaign as the most impressive example of such a story. Scotland the Brand is another campaign which was launched in the 1990s because of frustration at mediocre export growth and the lack of high value inward investment.

    Scottish industry leaders formed an advisory board to obtain joint venture funding from the government to form a specialist marketing unit to attract support for an integrated marketing campaign across industries. This is now a limited liability company funded increasingly by industry with the government’s contribution reducing over time.

    In stark contrast to this common sense approach, New Zealand has failed to make the most out of its natural advantages with each sector still trying to do its own thing while riding on the coat tails of the tourism sector’s 100% Pure branding. B+LNZ is in the process of trying to work out whether it has a role in market development, but it only plans to spend $5 million per annum on promoting a $9 billion industry. This is really not enough, although it is additional to what the meat exporters spend either on their own branding or on joint promotion with B+LNZ.

    You have to ask how much further this would go if New Zealand as a whole picked up on Mike Petersen’s concept of a coherent brand in support of which each industry sector and company could run its own promotional activity.

    All this makes the debate about farmer ownership of the meat industry look irrelevant; it’s more about how to use capital most effectively to participate in the value chain.

    It looks as if our red meat sector will enjoy increasingly strong demand from countries with serious growth potential which must inevitably push the value of our meat exports higher, as more markets compete for them. We may not have large amounts of capital to invest in each overseas market, but if we promote our product benefits coherently and intelligently without trying to cut our competitors’ throats, the future looks very promising. 


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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 allan@barberstrategic.co.nz or read his blog here ». This article first appeared in Farmers Weekly and is here with permission.

  • The Weekly Dairy Report: Fieldays dairy visitors show new resolve to survive under lower payout as the country enjoys a milder winter so far

    Another settled week, but lack of rain is still haunting the east coast of both islands as all are waiting the winter moisture recharge, to allow good growth in the spring.

    Water issues are being highlighted by the press, with accusations many irrigators are breaching their volume constraints and still some have yet to install water meters.

    Cow wintering is progressing well under these dry ground conditions, as present volumes of feed look adequate to reach targeted body condition scores.

    More cow deaths  have plagued Southland as fodder beet which has now grown to 20% of the brassica diet, has caused sudden death for a small percentage of animals who are poorly transitioned on this quality feed.

    Early herds up north will be planning Magnesium applications 2-3 weeks before calving as good winter grass growth is being seen with milder than normal temperatures for this time of year.

    This seasons NZ milk production appears to be back 1.7%, and with an expected 4% less cows, a fall of at least double that is forecast for next year.

    Last week’s global dairy trade auction result was stable, but included another 4.5% fall for main product whole milk powder, and reinforced the weak standing of the global dairy market.

    A2 Milk Australia have upgraded their profit forecasts and announced plans to increase returns and report waiting lists from farmers wanting to supply, and some NZ farmers will be wondering if they let this opportunity slip through their fingers.

    Reports from Fieldays week were surprisingly up beat on the mood of the rural economy, with previous years dairy spending replaced by the other more buoyant sectors.

    Dairy advisers report a new resolve amongst operators who are fine tuning their systems to farm with much lower costs and changing the focus from production to profit.

    Lincoln University achieves big corporate funding support for its Ashley Dene farm systems study, which will include a project involving the dairy, livestock and arable sectors.

  • The Sheep Deer and Cattle Report: Dry conditions in the east have some farmers nervous whether there will be enough feed in the spring

    LAMB

    Another small drop in this week’s schedules as export prices fall $6/head behind the similar stage last year.

    This year’s lamb crop is predicted to be at an all time low, with drought, facial eczema and disappointing returns decimating the nations flock numbers.

    The east coast of both islands are still very dry and concern is building whether future winter rains will create enough feed for early lambing mobs.

    This week’s Brexit vote will be watched by all lamb producers as analysts suggest negative trade outcomes for NZ, if Britain leaves Europe.

    Silver Fern Farms announced plans to upgrade their cool store facilities at Pareora after closing it’s leasing arrangements in Christchurch.

    Scanned in lamb breeding ewes have been making $100-$130/head at the saleyards up north, while store lambs in Canterbury lifted into the $80’s last week.

     

    WOOL
    The South Island wool auction saw only 62% sell even with a limited offering, as poor demand and a strong currency saw market run out of puff at the end of the season.

    Mid micron, coarse crossbred, and lambs wools, are all at yearly lows and well behind values at a similar stage last year.

    Good news however, with the announcement of a $21 million 7 year project to develop further uses for crossbred wool, starting with using the product as a source of keratin, and developing new technical textiles.

     

    BEEF
     

    Stable beef schedules again this week, as Oceania kills have declined and reducing volumes into the US has enabled demand to be maintained.

    Some warning signs in overseas markets for beef producers, as in the US good grass growth and the fastest herd expansion since the 70’s has analysts predicting beef production to be up 4% this year, and in Ireland beef prices are predicted to crash in their autumn.

    Saleyard store prices have remained firm with late calves and forward stores still attracting plenty of interest and prime steers and heifer pricing benefiting from the lack of supply.

    Fielday attendance and sales was stronger than most had anticipated, with dairys financial plight filled with optimism and investment from other sectors.

    Sire bull sales report above average prices and nearly 100% clearances as many are lifting their cattle to sheep ratios in response to below average sheep returns.

    MPI targets to double our primary sector export reciepts by 2025 look too ambitious after only a small rise from meat and wool and a 6% drop from dairy this year.

     

    DEER

    Venison schedules were stable this week on low volumes, and deer skins which are at historically low prices, are at last starting to move again.

    Fertiliser prices are still falling, with Super down $18/tonne and Urea $20, as the Co-Ops have promised to release the rebate earlier to help cashflow, and encourage reinvestment into the soils for the coming season.

  • Dairy farms prices are down nearly 15% compared to last year while lifestyle block prices and volumes set new records in May

    Farm prices eased back in May although dairy farm prices went against the trend and showed a surprisingly strong gain, according to the latest rural sales figures from the Real Estate Institute of NZ.

    The REINZ All Farm Price Index, which records sales of all types of farm properties and adjusts for differences in farm size, type and location, dropped 1.2% in the three months to May compared to the three months to April.

    Compared to the three months to May last year it was down 4.1%.

    The median price per hectare of all farms sold in the three months to May was $26,683, down 11.1% compared to the three months to April and down 6.6% compared to May last year.

    The number of farms sold was more of a mixed bag, with 489 farms of all types selling in the three months to May. This was up 20.2% compared to the three months to April, but down 2.7% compared to May last year.

    In the year to May 1766 farms of all types were sold, 1.1% more than were sold in the previous 12 months.

    Dairy Farm Price Index up 7.3%

    But there was a some good news for the beleaguered dairy sector in the latest figures, with the REINZ Dairy Farm Price Index, which adjusts for differences in dairy farm size and location, rising 7.3% in the three months to May compared to the three months to April, although it was still down 14.8% compared to May last year.

    Sixty dairy farms were sold in the three months to May compared to 52 in the three months to April and 87 in the three months to May last year.

    Grazing properties had the highest number of sales, accounting for 35% of all farm sales in the three months to May, followed by finishing properties at 22%, horticulture blocks 17% and dairy farms 12%.

    REINZ rural spokesman Brian Peacocke said the strength of sales of finishing and grazing properties was encouraging.

    "Demand for quality beef and arable farms is greater than supply, indicating a widespread shortage of listings, and sales values for kiwifruit orchards are confounding all expectations," he said.

    The lifestyle block market remained exceptionally buoyant, with the number of sales and median price both hitting all time highs.

    There were a record breaking 2518 lifestyle blocks sold in the three months to May.

    That was up 22% compared to the same period of last year, and was the highest number ever recorded since the REINZ began collating the data 20 years ago.

    The median price of lifestyle blocks also hit a new record high of $575,500 for the three months to May, which was up 2.8% compared to the same period last year.

    "Auckland-based purchasers continue to make their presence felt in all regions north of Taupo, particularly where solid employment options exist," Peacocke said.

    Lifestyle volumes sold - REINZ

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  • Keith Woodford says a lot depends on how Singapore/Hong Kong-owned Goodman Fielder responds to potential changes to their cosy access to Fonterra's milk supply

    By Keith Woodford*

    Since the formation of Fonterra in 2001, Goodman Fielder has always had a guaranteed supply of 250 million litres of Fonterra milk. MPI Minister Nathan Guy is now proposing that the time has come for Goodman Fielder to fend for itself.

    For the last fifteen years, the major milk supply chain in New Zealand has comprised one supplier (Fonterra), two processors (Fonterra and Goodman Fielder) and two supermarket chains (Foodstuffs and Progressive).  It has indeed been a cosy arrangement.

    It is this cosy arrangement, combined with a goods and services tax on food of 15% which is either absent or imposed at a lower rate in most countries, that has led to milk in New Zealand supermarkets being more expensive than elsewhere.  The processing and marketing margins are not disclosed, so the relative returns to the processors and supermarkets can only be estimated. But it is a fair bet that both processors and supermarkets do rather nicely.

    Some two years ago, I wrote a post called ‘Why is New Zealand’s retail milk so expensive where I made some international comparisons. Back then, I found that the farmgate-to-consumer margin per litre was $1.26 in New Zealand, but only 55c in Australia, 60c in the USA, and 65c in Canada. At this same time, the margins in the UK were even lower at 20c, but that was caused by non-sustainable competition, whereas the margins in other countries were long term and normal.

    The question now is whether removing Goodman Fielder’s current dairy supply system – a proposal which has not impressed Goodman Fielder at all – will lead eventually to a more competitive sector.

    First of all, it is important to understand something more about Goodman Fielder. In a corporate sense they tend to operate below the radar in New Zealand. But that is only in a corporate sense. Their brands are everywhere in the supermarkets.

    Goodman Fielder’s New Zealand brands include Meadow Fresh, Meadow Lea, Naturalea, Edmonds, Irvines, Ernest Adams, Chesdale, Tararua Dairy, Olivani, Vogel’s, Molenberg, Freyas, Mackenzie High Country Bread, Quality Bakers and Puhoi.  That is not all of them.

    So who actually is Goodman Fielder?

    Goodman Fielder has diverse roots in both Australia and New Zealand, and most people think of it as Australian, but from 2015 the two joint owners are Wilmar International headquartered in Singapore and First Pacific from Hong Kong.

    Wilmar International describes itself as ‘Asia’s biggest agribusiness group’ but its spread is worldwide. Amongst many other things, Wilmar is the largest global refiner of palm oil, and it is also a source of PKE used on New Zealand farms.

    First Pacific is a Hong Kong Investment company with assets in food and telecommunications. The Goodman Fielder investment comprises between 3% and 6% of its total portfolio, depending on how the calculations are done.

    The bottom line is that Goodman Fielder is a dominant force in New Zealand food, with huge financial muscle sitting in the background to be called upon when needed.

    So how will Goodman Fielder respond when scratched in this way by Minister Guy? The one thing for sure is that it will have to do something.

    In theory, Goodman Fielder could still get its milk from Fonterra under contract, but that would be at prices determined by Fonterra rather than current regulated prices.  So Goodman Fielder would be cautious of that, given the associated power relationship with Fonterra being both competitor and supplier, with power to screw the scrum. 

    The second option would be for Goodman Fielder to contract milk from other milk processors, with Open Country an obvious option for the North Island.  Open Country would be amenable to that. However, Open Country does not have suppliers in Canterbury and these would be needed for the major Christchurch factory. Westland Dairy co-operative would be an alternative option for the South Island. Regardless of the specifics, Goodman Fielder would want to be in a position that leaves it in control at the bargaining table.

    A third option is that Goodman Fielder could contract its own suppliers. But as long as Goodman Fielder’s New Zealand focus is primarily on the internal market, then this is unlikely to be attractive. This is because managing the vagaries of farm milk supply is not part of Goodman Fielder's core business, and managing supply would be a distraction.  To meet present demand, they would need about 150 average-sized farms across the country. Having its own supply of farmers would work best in conjunction with manufacture of both short and long-life dairy products, and with greater scale than present.

    That opens the possibility that Goodman Fielder might broaden its dairy vision and become a major dairy exporter to Asia. They already do some exporting of Meadow Fresh UHT products. So this, plus their own farmer supply, could become the stringboard for a much wider suite of products. There is little doubt that if they wanted to, Wilmar International together with First Pacific have the financial muscle to make it happen.

    If Goodman Fielder were to climb onto the springboard, then in the process New Zealand’s consumer dairy products could be catapulted into the 21st century. Quite simply, both Goodman Fielder and Fonterra currently treat the New Zealand market as an international backwater. If anyone doubts that statement, when next on holiday in Australia just look at the chiller cabinets over there in comparison to ours.

    In theory, there is nothing to stop start-up companies here in New Zealand taking on the giants internally within this country, and there are already examples of companies which try to fill specific niches. But with two big giants in the background, any potential new entrant has to think carefully.

    The rules of the game allow financial muscle to be exerted within New Zealand’s business environment in ways that could not occur in many overseas jurisdictions.   And wherever duopolies exist, there is huge market power to be protected. So rocking the boat by new entrants needs to be done with caution.

    So will deregulation of farmgate milk supply really change anything much either in the supermarket chiller cabinets or back at the farmgate?  Could it even result in a curved ball being thrown back to Fonterra, with Goodman Fielder stirring from its dairy slumber and creating a major integrated dairy chain into Asia?  Or will Goodman Fielder simply say that dairy in New Zealand has been a nice little money earner, but in the new environment its assets are better employed elsewhere?   It’s somewhat like a game of chess, but in this case a lot more depends on it.


    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 http://keithwoodford.wordpress.com

  • Part three of Allan Barber's perspective of the New Zealand meat industry. The need to find points of difference that motivate consumers will become the key to future properity

    By Allan Barber*

    This is the third part of a presentation I recently gave to a Beef + Lamb Field Day about the meat industry. The first part is here, the second part is here.

    The future

    There are two diametrically opposing views on the meat industry’s future outlook: either the world is short of protein and has an insatiable appetite for what we produce, or meat will be replaced by artificial or synthetic proteins, much cheaper and easier to produce.

    I can’t predict just where on the continuum between these two extremes actual reality will settle or which direction the trend will move.

    But it’s probably worth hazarding a guess that the top end of the market will continue to prefer the real thing, produced and presented to a high quality, while the poor who are unable to afford much if anything will be happy to accept the cheaper, artificial version. It is also quite possible the increasingly global craze for fast food, especially hamburgers, could be met by synthetic beef, but here again there would be a premium end of the market demanding the real thing.

    This suggests that there is a future for farmers, processors and marketers, but it will require a move away from the commodity end of the supply chain. I am not about to speculate on the future demand for dairy products, but one scenario would see cull cows becoming an unwanted by-product of the dairy industry, instead of a profitable input to the meat industry.

    This would present an opportunity for sheep and beef to reassert itself as a profitable, premium farming activity, but it ultimately comes down to finding market niches instead of supplying a commodity.

    For example, Coastal Spring Lamb, starting small and supplying Foodstuffs, has now combined the lamb production from 11 farms around Whanganui for export to Vietnam, Thailand and other Asian markets. They have successfully marketed their brand to chefs in top restaurants, starting with spring lamb from five farms, but have now expanded their supply to the extent that they can maintain regular supply of lamb, not just spring lamb, for most of the year. This is frozen product, shipped in containers, which gives the lie to my statement about frozen product not being able to command a premium.

    This arrangement underlines the need to find a processor that is prepared to pay a premium for the lamb that meets the specifications, but it also indicates the difficulty of developing niche products that can extract meaningful premiums. Undifferentiated products will remain directly exposed to price and demand volatility.

    The main opportunities rest with lamb and prime beef which can be targeted at the chefs of high quality restaurants in carefully selected markets. Unfortunately there will only ever be a relatively small proportion of our production output that can be guaranteed to meet the specifications of timing, weight and eating profile of those niche markets. There will also be opportunities for top class wool to be used in highly priced clothing and textiles, while co-products for sophisticated medical applications and health benefits can earn good money.

    There remain a larger percentage of products that will inevitably come on stream during the peak of the season, whatever the impact of climate change is on our seasonal production patterns. There will be demands on farmers, as usual, to cope with these climatic conditions and to have sufficiently robust and flexible farming systems to respond to the needs and economics of the market. This will put more pressure on farming expertise and scientific input into genetics and pasture types.

    Meat companies will also have to be efficient, responsive and flexible in their processing operations and marketing strategies. Those that fail to keep up plant reinvestment programmes will fall by the wayside. Government and trade negotiators must continually achieve the best possible trade agreements and our food safety and biosecurity authorities must ensure credibility of farm and plant licensing so that our trading partners accept New Zealand’s systems as meeting guaranteed food safety standards.

    I believe our food safety and animal welfare standards will become a major point of difference for New Zealand meat exports.

    In summary, an industry which has now produced a massive part of New Zealand’s overseas income since 1882 has challenges, if it is to continue exerting such a large influence in future. But I am confident the broader meat sector, farmers, scientists, processors and exporters alike, will innovate and achieve success in the future with a high quality, differentiated product.

    There will be major challenges in handling climate change, environmental standards, sustainability issues, pasture growth, animal health, antibiotic and chemical resistance, food safety demands and addressing the question of whether New Zealand adopts GM or not.

    It will be an exciting journey.


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    Farms For Sale: the most up-to-date and comprehensive listing of working farms in New Zealand, here »


    Here are some links for updated prices for
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    beef
    deer
    wool

    Y Lamb

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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 allan@barberstrategic.co.nz or read his blog here ».

  • Another flat global dairy auction result points to an ongoing slog for the country's dairy farmers

    By David Hargreaves

    A flat overall result in the overnight GlobalDairyTrade auction, but with, more worryingly, the second consecutive fall in the price of the key Whole Milk Powder, points to the new season being a continued slog for dairy farmers.

    The WMP prices slipped 4.5% to US$2118 per metric tonne. This followed a 2.1% fall in the previous auction at the start of this month.

    It means that the WMP prices have fallen by nearly 6% in the past two auctions.

    In the last auction for 2015 the WMP price was US$2304/mt, so today's prices are still some 8% down on that level, which demonstrates that the anticipated lift in prices is slow coming.

    However, these figures are not the whole, or even a completely accurate, picture.

    According to Reserve Bank figures the Kiwi dollar was worth US68.48c at the end of 2015. However, by the end of January 2016 the Kiwi was sitting down at US64.82c.

    Since then, however, things have turned. At time of writing the NZ dollar was worth US70.34, which is about 8.5% higher than it was at the end of January.

    At the last dairy auction in January the WMP price was US$2188, so today's price was 3.2% down on that level. However, if you convert the two prices into New Zealand dollars it can be seen that at the prevailing exchange rate of US64.50c on January 19, the day of the auction, the WPM price was NZ$3392/mt.

    Today's price of US$2118 converts to NZ$3011/mt.

    So, on that basis, the WMP price is 11.2% lower than it was at the end of January.

    Fonterra is expecting gradual improvement in prices as the season goes on, and has given an opening milk price forecast of $4.25 per kilogram of milk solids.

    Many economists are expecting a better price than that ultimately. However, ANZ economists said at the time the opening forecast was given on May 26 that while they were inclined more toward the high $4/kg MS as an ultimate season-end price, the price action in the July/August period would be critical. Something in the high $4/kg MS would involve the NZD/USD trading around the mid-0.60 cents and wholemilk powder prices heading back to around US$2,500/mt, they said.

    Clearly we are a long way away from such a scenario at the moment.

    The Reserve Bank, while again talking of the need for a lower Kiwi dollar, left the Official Cash Rate unchanged at 2.25% last week. Nervousness about the Auckland housing market was perceived as the biggest reason for the non-move.

    Key potential developments for the Kiwi dollar before the RBNZ makes its next call on interest rates here on August 11 are next week's European referendum vote in the UK and the next US Fed decision toward the end of July.

    It's probably fair to say that the RBNZ will be hoping from the NZ dollar perspective that 'something gives' before it has to make that August 11 call. The dairy farmers will be hoping so too.

  • Sentiment in the export market is turning negative, while domestically log suppliers are facing growing import challengers

    By Peter Weblin*

    This month both domestic and export log prices were flat. Domestic logs continue to have strong demand, buoyed by strong domestic, Australian, USA and Asian wood products markets.

    Sentiment in the export log market has turned negative and price reductions are expected over the next few months. Since this would cause an inflexion point in the market (change in direction), this issue of Wood Matter’s Log Market report is devoting more attention to the Outlook section at the end of this report.

    Export Log Market

    Export log prices flat-lined in June but with a backdrop of unfavourable developments. At about the same time as most NZ at-wharf-gate prices were being set for the month, reports were coming in of in-market “A” grade price (CFR price) falling by US$5-7/JAS m3. For most suppliers this decrease will impact on June prices (see Outlook – Export Logs below).

    Log stocks in China are reported at 2.5 million m3, down on last month’s 2.6 million m3. Normally this would be supportive of log price! The reason it is not, however, is that sentiment and near-term outlook has turned negative and this has led to weak sellers taking price-drop sales. These will likely trigger a flow-on series of price drops.

    China continues to be New Zealand’s most important log export market with nearly three quarters of all logs exported going to this market (see chart below).

    Chart courtesy Champion Freight

    A big driver of the log market in China is other softwood imports. These sources compete with Radiata pine from New Zealand. A big component of softwood import volumes into China is softwood lumber.

    Whilst softwood log supply from Russia has been declining for years, supply of softwood lumber has been increasing. This trend was boosted about six years ago by log export tariffs imposed by Russia (lumber avoided the costly tariffs). Despite the tariffs being subsequently eased, the investment in producing lumber in areas such as Siberia and Russia’s Far East has burgeoned. In 2005 Russian exported just under one million m3 to China; in 2015 volumes reached nearly 10 million m3.

    This supply of softwood lumber, most of which enters overland by rail, is more difficult to monitor and has a bigger impact on the log market than log sales since it is already converted to the saleable end-use product (whereas logs have to be converted at, say, 75% conversion factor).

    These changes affect the dynamics of the market and the challenges related to understanding and forecasting what might happened to the demand and price of New Zealand Radiata pine in China.

    Domestic Log Market

    The drivers in the domestic log market really haven’t changed since last month. If anything, the primary driver (the housing market) has strengthened as Auckland (and now other regions’) property prices soar and daily media commentary includes sound bites of “housing bubble”, “out-of-control private debt” and “why isn’t the government fixing the problem”.

    With much of the focus on “fixing the problem” involving increasing housing stock, it’s probably reasonable to expect the New Zealand domestic wood market to remain favourable for the foreseeable future.

    However, the domestic wood market is not without its challenges to domestic wood processors.

    While visiting a friend’s house construction site over the weekend, I was shocked to hear that Chilean plywood was being used on the site in preference to the equivalent NZ product. When I indignantly challenged the proud soon-to-be house owner (implying a concerning absence of buy-Kiwi loyalty), I was told that delivered to site, the Chilean product was 30% cheaper, and good quality. When a couple with a young family is climbing into house ownership in an increasingly un-affordable market, it’s hard to get too righteous about supporting domestic processing if it means adding considerable cost to building a new family home. There are no easy answers here.

    New Zealander’s strong preference for wood-framed housing and a strong property market is a boon for domestic wood processors although they still have to compete with low-cost producers in Chile and Europe.

    PF Olsen Log Price Index to June 2016

    The PF Olsen log price index flat-lined in June at $122. It is still $35 higher than its 6-year 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 - June

    Log Grade $/tonne at mill $/JAS m3 at wharf
      Jun-16 May-16 Apr-16 Mar-16 Feb-16 Jun-16 May-16 Apr-16 Mar-16 Feb-16
                         
    Pruned (P40) 196 196 196 196 195 195 195 195 198 198
    Structural (S30) 113 112 112 112 112          
    Structural (S20) 98 98 98 99 99          
    Export A           131 131 124 128 127
    Export K           124 124 118 122 120
    Export KI           112 114 106 110 108
    Pulp 51 50 50 51 51          

    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.

    Outlook – Export Logs

    Sentiment in the export log market has turned negative. Whilst log stocks in China are still at levels that typically support a robust market (2.5 million m3), a number of short-term concerns are becoming more prominent. In-market (CFR) prices are reported to have fallen by as much as US$7/JAS m3 with some traders. This has yet to flow into most NZ$ at-wharf-gate pricing. Whether the in-market price falls any further will depend partly on the level of resistance from NZ exporters to further price falls, but also on how the supply-demand balance plays out over the next few months.

    China is entering its “hot season” – summer, which is also the “rainy season” - monsoon. Toward the end of summer is the “harvest season”. During this time of year, construction activity slows due to a combination of the effect of climate on productivity (initially) and reduced labour availability (latterly), as more workers divert attention to bringing in the crop harvest. This reduces demand for logs. How much this affects log price will depend on the extent of the reduction in demand, and, of course log supply volumes during this period.

    Based on log export volumes reported by Champion Freight from the various export ports around New Zealand (see chart below), New Zealand isn’t putting any additional log export supply pressure on the markets. We also expect a fall in log production over the next few months as cold, wet weather hampers production in poorly-roaded blocks and those with more sensitive soils.

    Chart courtesy Champion Freight

    There is considerable talk about strong log export volumes coming out of Australia, but as discussed in the May 2016 Log Market report, they probably peaked in 2015 and are likely to decline thereafter. Russian log supply typically declines at this time of year as harvest levels reduce during the ground-thaw. The Pacific North West is increasing supply currently, but this is not expected to get to levels sufficient to significantly increase log stocks in China.

    On balance, it’s hard to see a compelling case for the in-market (CFR price in US$) to fall much further.

    However, the NZ$:US$ cross rate has moved up from 0.68 at the beginning of June to just under 0.71 in mid-month trading. If this was fully imputed into “A” grade price, this is a NZ$9/JAS m3 “haircut” for at-wharf-gate price. If the exchange rates persists over 0.70, this will put added downward pressure on NZ$ at-wharf-gate prices next month.

    The final leg of the three-legged pricing table is ocean freight. Bunkers (fuel for ships) and vessel charter rates have been in a firming trend for the past few months. This has continued in June albeit modestly. Adding to upward pressure on ocean freight rates is the heavier winter logs which lowers the stow factor of log cargoes.

    In summary, there are multiple factors diving Chinese log price down. This is expected to result in unpruned export log prices coming down to just above two and five-year trend levels over the next month or so, i.e. around the NZ$110/JAS m3 for “A” grade. Pruned logs should be a little less volatile.

    Korea and India should continue to provide some alternative sales options at prices sometimes better than those available from China. However, China tends to drive sentiment across all markets.


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

  • The Weekly Dairy Report: Irrigated wells at risk in Canterbury as the nations yearly milk flow falls by 1.7%

    More settled weather, with mild conditions mixed with frosts saw the snow disappear from the mountains, but provide good utilization for cows on crops.

    However the dry period continues to worry, as some wells in Mid Canterbury are at their lowest levels for 66 years, and the water replacement scheme to boost the aquifers from the river, seems well founded.

    Hydrologists suggest replenishment of the ground water reserves relies heavily on rains in May and June, and with last months rains just being absorbed by the sub soil and little rain this month, irrigators could be facing an uncertain spring summer with unreliable wells.

    Managers are looking to rebuild body condition back to 5 for mixed aged cows and 5.5 for younger animals, but also have to grapple with the compromise with attaining these goals, of having adequate feed covers at calving in a weak cash environment.

    Advisers report on a Northland trial, that shows a low cost pasture operation is more profitable than an imported feed or extra crops systems, with lower income compensated by much lower costs, for a better return.

    The latest Oceania milk prices revealed good lifts over all milk commodities, but these sadly were all nullified by the big currency rises this week, with the US dollar reaching a yearly high.

    Tomorrows global trade auction result will once again be viewed as a snap shot of the global dairy market, but with world stocks of dairy commodities still growing, surplus supply needs to be addressed first before any upturn will seem likely.

    The milk production year ended 1.7% down in June and was better than was earlier expected, but with cow numbers back 4% and some collateral damage expected out of the facial eczema outbreak, analysts are suggesting a further 3-5% fall is likely next year.

    The Fonterra governance vote, while receiving support from 64% of voters failed to reach the 75% acceptance level necessary for change, and it's back to the drawing board for those driving the review.

    Synlait announced it’s new season rate at $4.50/kg ms, but adjusted back this year’s figure to $3.90, in line with both Fonterra and Westland.

    Yili's Oceania plant in South Canterbury announces another loss this year, but it is at a lower level as they build production and specialise into better returning products.

    Total farms being offered for sale is now nearly half what was it was 3 years ago, as the dairy debt has ballooned to $40 billion or $2/kg ms.

    Federated Farmers has responded to calls to limit immigration by stating there is a genuine shortage of NZ workers prepared to do dairy work, and migrantsare filling an important role in that regard.

    Fieldays week will be viewed differently by dairy farmer visitors this year as they look for ways to reduce costs out of their systems, rather than spend up on capital improvements.

  • Keith Woodford considers what Fonterra needs to think about while they "take a breath", suggests a better voting system, shows dangers of a too-small board

    By Keith Woodford*

    The key message from this month’s failed governance restructure vote is that Fonterra’s directors and the Shareholders’ Council must go back to the drawing board. Farmers do want change, but nothing can happen without 75% support from voting members. So where to from here?

     Calculated over the total membership, approximately 37% of the voting electorate said ‘yes’ to the proposals, 21% said ‘no’, and 42% sat on the sidelines. Those 42% on the sidelines were either confused, disenchanted, or distracted by other events.

    It is hard to believe that any of Fonterra’s farmers could consider themselves to be disinterested. This is because, unlike most investors who have diversified holdings across many companies, Fonterra’s farmers are totally dependent on Fonterra. It is a very special relationship.

    Chairman John Wilson is saying that it is time to take breath and that makes sense. This time they need to get it right. So both Fonterra’s directors and the Council need to reflect on the implications of failure.

    The key reason the Board and Council got it wrong last time is once again because of group-think. If they had tested their ideas more broadly, specifically asking key thought analysts to search hard for flaws, rather than seeking endorsement, then a lot of angst could have been avoided. 

    The problem was that Fonterra produced a selection process for future directors that was fundamentally flawed. Despite the apparent unanimous endorsement of both the Board and the Council, the tide turned in the last ten days once the flaws were exposed and so the vote was lost. This was despite many farmers having already voted ‘yes’ before the tide turned.

    The key issue is that farmers were being asked to delegate the power of choosing the new directors, or re-appointment of current directors, first to three independent business men for shortlisting, and then to representatives of the Board itself for final selection.  It was all too cosy.

    The counter argument was that an open election does not produce the best candidates. Also, that prior name recognition can be a key determinant of success, rather than genuine ability.

    The path forward must surely be to make better use of the Shareholders’ Council as an electoral college.

    For reasons that are obscure, reform of the Shareholders’ Council was laid aside while Fonterra dealt with restructuring the Board itself. That was a strange decision, given that the Shareholders’ Council and the Board are both elements of governance.

    I have always believed that the notion of having a shareholders’ council at Fonterra was important. In a co-operative with some 10,000 members, there has to be a group that represents farmers to the Fonterra Board. Without such a structure, the individual farmer is effectively disenfranchised.

    Despite the importance of the Council as a representative body, in practice the relationship between the Council and the Board has often been tangled.   Quite simply, the Council has had no real power.

    If the ward-elected Council were in the centre of the Board appointment process, then many things would change.  First, this would produce a higher calibre of Council member. More good people would stump up, knowing that councillors had genuine influence. Second, it would mean that the Board would treat the Council with respect, knowing that the Council would be making the decisions about who should be returned and who should be replaced at the next election. All of a sudden, Fonterra directors would be accountable to a lead group of Fonterra farmers who would be in a position to assess their performance.

    With this system, it should be the full Council, and not a sub-committee with its own power relationships, that would vote on the candidates. The council would develop its own processes for interviewing and assessing the skill sets of candidates.

    For the candidates themselves, it would mean they could focus on communicating in depth their skills, experience, and vision to a modest-sized group rather than stumping up and down the countryside electioneering in draughty halls.

    It would be up to the Shareholders’ Council members to liaise back with their ward members, just as it is now, on matters that they wished to be represented on. The fundamental difference would be that farmers would actually consider it worthwhile to engage with their councillor, knowing that councillors now had some influence and would be listened to by the Board.  And farmers would make sure they were represented by someone on the Council who did genuinely represent their interests.

    In setting up the system this way,there are lots of details to be worked out. But no more details would be necessary than had to be developed for the governance proposal that farmers have just turned down.

    One of the key accompanying decisions is the specific voting system to use. Personally, I am a fan of the single transferable vote (STV) system as it does increase the chance of getting diversity. However, it remains poorly understood, in large part because of a failure of Fonterra to effectively communicate to its members the rationale for this system.

    Within Fonterra’s membership, there has been too much focus on the so-called limitations of the quota requirement within STV. In essence, the STV is a ranking system. The so-called quota is just a measure of the point at which a leading candidate can no longer be overtaken, and a trailing candidate can no longer make up a deficit, through further re-assignment of preferences.

    One of the important advantages of STV is that it prevents two strong candidates who are attractive to the same voting constituency from cancelling each other out and allowing a third weaker candidate to come through the middle.  It means that there is no ‘gaming’ within the voting process, and voters do not have wrestle with the issue of ‘wasted votes’. All it requires is for voters to rank their preferences.

    Although empowering of the Shareholders’ Council as a Board electoral college has much to commend it for election of farmer directors, this is not necessarily the best way forward for non-farmer directors. These people need to be appointed for specific skill sets that are otherwise missing from around the Board table.  It is the Board itself which can best identify these missing skill sets, and then set in place a professional search process to find the best candidates.  The Board should then nominate preferred non-farmer directors for endorsement or rejection by the Shareholders’ Council.

    Currently, there is a groundswell of opinion in favour of a smaller Board, and so I expect that notion to come forward again at the next iteration. In doing so, farmers need to reflect on the narrowing of the field this creates when it comes to finding a suitable chairman with experience and requisite wisdom. Within Fonterra, the role of Chairman is crucial, and has its own unique skill requirements, which are not necessarily found in many otherwise competent directors.

    The worst outcome of all would be a small Board with open election by all members. There are always going to be some weak performers in a Board elected that way, and it can be very hard for members at large to identify those directors who are ‘all noise but lack substance’.


    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 http://keithwoodford.wordpress.com

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