• The Weekly Dairy Report: Optimism on the upturn surges with another strong dairy auction

    The country continues to enjoy plentiful feed conditions due to regular November rains, although some farmers are wanting more sunshine for lamb finishing and to stimulate crops.

    Winter feed establishment looks good with lack of winds allowing good seedling survival, but some slug damage has occurred in early direct drilled fodder beet crops.

    Baleage volumes are strong as farmers harvest the surplus feed, some to boost supplement reserves, others because stock shortages for grazing options are limited, and this is the only option.

    Growing use of beef bulls, mainly Hereford, is being seen for the non replacement side of the dairy herd, as demand grows for dairy beef bulls and heifers for finishing.

    The $6 forecast by Fonterra has been followed by Synlait and bettered by Tatua ($6.00-$6.50), but Westland and Open Country lag behind by 25-50c/kg ms, as Chinese milk powder imports lift by 15% as their stocks get low.

    Farm confidence rates have moved considerably in the latest survey, with the sector much more optimistic on the future after the lift in dairy prices.

    Tuesday nights auction again reflected a strong dairy commodity market, with buyers pushing prices ahead by another 3.5%, lead by a nearly 5% rise in whole milk powder prices.

    Analysts are now saying $6 is a given, and more could be in the offing, and those banks with a big exposure to the sector will be breathing a big sigh of relief.

    The Dutch look to a big reduction of dairy cow numbers to meet the EU phosphate and nitrogen leaching obligations from 2017, and this could be a stark warning for NZ farmers how environmental regulations could restrict on farm production in the future.

    The EU sells 22,500 tonnes of skim milk powder out of it’s intervention stocks and the release of this product may put a handbrake on future price increases with this product.

    The Westland Milk Products AGM was filled with a very big crowd of angry shareholders disappointed in the poor performance of their company, and listened as the new leadership reported confidence in the strategy but stated there is no short term fix to the companies present position.

    Another milk plant with a big Chinese investment " turns the first sod ", as Mataura Valley Milk enters the market with plans for added value milk products and the loss of market share in Southland for Fonterra.

  • ANZ economists lift their milk price forecast to $6.25 compared with Fonterra's current forecast of $6 after further gains in global dairy prices

    By David Hargreaves

    ANZ economists have been quick off the mark, raising their expected milk price this season to $6.25 per kilogram of milk solids after global dairy prices again rose.

    BNZ economists have now raised their forecast to $6.40, while Westpac economists now see a $6.20 price. ASB economists who not so long ago stood alone in forecasting a price as high as $6 have not changed their pick, but see "clear upside" to the $6 price.

    In the overnight GlobalDairyTrade auction prices as measured by the GDT Index gained 3.5%, consolidating on a string of recent gains.

    The Key Wholemilk powder price climbed 4.9%, with the average price, at US$3,593, now at its highest level since June 2014 - though it was as high as US$5,000 at the beginning of 2014.

    This calendar year overall prices as measured by the GDT are up some 48%, while the WMP prices are up 55.9%.

    Fonterra, having initially forecast a price for farmers this season of just $4.25 has been revising it upward as prices have continued to rise and hold at higher levels.

    In November it increased the forecast again to the current $6, but this is now looking light.

    ANZ agri economist Con Williams said current market indicators were now pointing toward a $6.40 to $6.50/kg MS milk price in 2016/17.

    "This assumes current prices can hold through the remainder of the season," he said.

    "All up, tight supply dynamics remain price supportive both here and abroad, but we expect some improvement in supply conditions in the New Year period. This is due to higher global farmgate prices now filtering through, the onset of warmer conditions in New Zealand, and European seasonality."

    Williams said combined with demand moderation from China (part seasonally driven), New Zealand powders being more expensive than those of other origins, the Europe Commission beginning to sell down some of its stockpile in December and USD/emerging market strength, these are together expected to take some heat out of prices sometime in the New Year.

    "Still the moderation is likely to deliver something north of current dairy processors’ forecasts, and on that basis we increase our milk price forecast to $6.25/kg MS."

    See here for the full dairy payout history. 

  • New Zealand farmers look to 2017 with optimism, with overall confidence levels staying high, says Rabobank survey for November

    Content supplied by Rabobank

    Confidence levels among New Zealand’s farmers remain high but have tempered slightly, the latest quarterly Rabobank Rural Confidence Survey has found.

    After surging considerably in the previous quarter – off the back of improved dairy farmer outlook – the latest survey, completed in early November, recorded a small decline in sentiment among farmers.

    The overall net confidence reading fell to +25 per cent, down from +35 per cent last quarter, but remained at net positive levels for the third consecutive quarter.

    The survey found the number of farmers expecting the rural economy to improve in the next 12 months had fallen to 39 percent per cent (down from 48 per cent in the previous quarter), while the number expecting it to worsen rose to 14 per cent (up from 13 per cent). A total of 42 per cent were expecting similar conditions (down from 37 per cent).

    Rabobank New Zealand general manager for Country Banking, Hayley Moynihan said the positive outlook for the dairy and horticulture sectors had kept overall confidence in the agricultural economy high.

    “The prospects for the dairy and horticultural sectors are good for 2017 and, while overall confidence has come back slightly from last quarter, it’s still significantly higher than the levels recorded throughout 2015 and early 2016,” she said.

    Ms Moynihan said the primary driver of the fall in overall confidence was reduced optimism in the prospects for the sheep and beef sector. “Sheep and beef farmers are likely to experience a tough season. Lamb prices have reached the seasonal peak, with the lucrative UK and EU Christmas trade now finished, and returns have been around 10 per cent lower than last year. While on the beef side, global prices are under pressure – and the beef schedule is likely to weaken in 2017,” she said.

    “The high New Zealand dollar, particularly in relation to the British pound, is also making life difficult for sheep and beef farmers – which is unfortunate considering the improving market demand in other overseas markets – and the pessimism surrounding this sector appears to be the biggest contributor to the lower expectations for the performance of the broader agricultural economy.”

    Farmers’ expectations for their own businesses in the next 12 months also came back slightly from the previous survey, but remain strong.

    Overall 42 per cent of farmers expected the performance of their own farm business to improve over this period, 34 per cent expected it to remain the same and 21 per cent for it to worsen. This resulted in a fall in the net reading for this measure to +21 per cent, down from +28 per cent in the previous quarter.

    Ms Moynihan said a closer look at the survey results by industry highlighted the vastly different expectations in farm performance amongst farmers in New Zealand’s two largest agri sectors.

    The survey found sheep and beef farmers were significantly less positive about their own businesses than last quarter registering a net reading of –25 percent this survey, from +two per cent previously.

    Conversely, the reading for dairy farmers rose to +67 per cent from +57 per cent last quarter. “Given the current challenges facing the sector, it’s not surprising we’ve seen a substantial drop in sheep and beef farmer expectations. On the other hand, dairy farmer expectations for their own business have lifted for the third consecutive quarter,” she said.

    The survey found 70 per cent of dairy farmers have expectations for their own business performance to improve through 2017 and just three per cent consider their farm business performance may worsen next year. This is the highest reading of individual business optimism among dairy farmers since 2013 when commodity prices reached USD 5,000 / tonne. “This further improvement in dairy farmer confidence followed significant commodity price hikes in Global Dairy Trade Events since the last survey and Fonterra recently raising their forecast farm gate milk price for the 2016/17 season to $6.00 kg/ ms,” Ms Moynihan said.

    “While dairy farmers are really positive about the coming year, the survey did also highlight that they remain wary of price volatility. 39 per cent of dairy farmers surveyed noted the risk of falling commodity price to the general agricultural economy, while almost one third are watching for weakness in overseas markets.”

    Horticulturalists’ expectations for the performance of their own businesses dropped to a net reading of +19 per cent back from +26 per cent last quarter. “This is the second consecutive fall in horticulturalists’ expectations for their own businesses, however, it continues a run of net positive results dating back to the September 2015 survey,” Ms Moynihan said. “Growing conditions have been good for a number of horticultural industries and this – combined with on-going strong demand for horticultural produce in export markets, especially for kiwifruit and pip fruit - will account for the continuing high confidence levels among this sector.”

    Investment intentions amongst farmers rose to a net reading of +17 per cent from +11 per cent last quarter, the highest reading since late 2014. A total of 28 per cent of respondents expected to increase investment (24 per cent last quarter), 61 per cent expected investment to remain the same (compared with 63 per cent) and 10 per cent (from 13 per cent) expected investment to decrease.

    Horticulturalists had the strongest investment intentions with net +33 per cent looking to increase investment, followed by dairy farmers at net +22 per cent and sheep and beef farmers at net +7 per cent.

    “With dairy farmers’ confidence levels in their own business performance so high we might have expected even stronger investment intentions among this group, however, with an average of $2.60 kg/ ms of debt having been accrued by dairy farmers across the industry during the downturn, repayment of a portion of this debt is likely to be a focus for many,” Ms Moynihan said.

    Conducted since 2003, the Rabobank Rural Confidence Survey is administered by independent research agency TNS, interviewing a panel of approximately 450 farmers each quarter.

  • The Sheep Deer and Cattle Report: Weaning drafts disappoint as managers try to recoup prices with heavier weights


    Weaning is now well underway and returns off the early drafts continue to disappoint even for heavy lambs, as farm confidence has dropped sharply for sheep and beef farmers in the latest survey.

    Schedules are falling slowly but still include a procurement premium as exporters strive to fulfill export comitments and price carefully for the stocks of frozen product.

    The plentiful feed has kept processing volumes low and kept schedules from adjusting down as fast as early market indications suggested they would.

    There is however just some small signs of recovery, lead by lifting demand in most markets except the UK, and slow production out of Australia.

    Small volumes of store lambs are being traded out of North Canterbury in the 270c-300c/kg range, but $80 per head seems to be the maximum, and margins appear trimmed at these rates.

    In the North Island strong winds have dried up the east coast and farmers are quitting stores and prices are easing back as a result, with smalls selling in the mid $30's and large animals barely making $70. Prices were firmer out of the Manawatu saleyards where more feed and some demand from the South Island saw prices about $10/head stronger.

    Demand is strong for cull ewes for toppers and some sales have seen store ewes exceed returns for prime lambs.

    Scientists report greenhouse gas emissions on hill country are less than previously thought, as farmers demand strong science before being forced to change management systems to solve issues in this area.

    Beef and Lamb NZ report the lamb crop is down 1.3% on last year, but an increased lambing percentage off fewer ewes, has limited the drop in numbers.


    The South Island auction again failed to inspire and only 80% of the offering sold and at prices behind the last Christchurch sale.

    The absence of Chinese buyers in the crossbred wool market who often buy nearly 50% of the offerring, has driven the market lower 

    The wool price indicators did lift however on last weeks NI sale, and Merino wools continue to shine, with a high of 1648c/kg not exceeded since 2012, on the back of a very strong Melbourne sale.

    Another mainly stable week for beef schedules as chilled markets are all short of product, and Asian demand remains strong.

    For all cattle classes except heifer, processing volumes at 5 November were well behind last year, as farmers look to put extra weight onto animals to utilise all the feed the spring has brought.
    Beef farmers are still struggling in the US, with very cheaply priced poultry and pork and high domestic cattle kills ruling the market, but low processing numbers in NZ have minimized the effect here.
    Weaner dairy bulls are selling for $4/kg/lwt plus in the Canterbury province well below NI returns, but saleyard prime steers are trading  about 20c/kg lwt stronger in the South.

    Store cattle continue to trade well above schedule levels, driven by the surplus feed and few other profitable grazing alternatives.

    The summer venison schedule fall seems to be stalling as the frozen negotiations close, and with good demand keeping prices strong, and reports of successful sales of chilled product, off season lows  should stay ahead of last year.

    The velvet market has reached an impasse with buyers wanting a 20% reduction, while sellers are prepared to ease about 10%, to reflect the negative currency movements.

    Road buyers have taken advantage of this, and are offering $100-$105/kg to those who need a quick sale.

  • Allan Barber looks closer at the financial results of the Alliance Group and finds plenty of operating improvement, but the profit gains touted look minor given the size of their business

    By Allan Barber*

    At first sight the Alliance profit of $10.1 million for 2016 appeared to be a small but definite improvement over the previous year’s result when no supplier distribution was made

     In contrast the directors have decided to pay $9.8 million to their suppliers, although about a third of this will be retained to ensure suppliers share up to a shareholding consistent with their livestock supply volumes. Therefore the final post tax profit was a bare $100,000.

    The press release on 10th November talked up this result as a very positive outcome of the company’s new business strategy which delivered $56 million of gains, compared with a budget of $34 million with a lot more to come. There is no way of finding where these gains actually came from or how they were achieved from an analysis of the detailed financial statements in the annual report.

    It is quite clear that the debt level came down with a bump from $129 million to $41 million which enabled Alliance to do away with seasonal debt, increase the equity ratio to 71% and make the very welcome distribution to its shareholder suppliers.

    However the major items which led to the lower debt were a substantial reduction in debtors and inventory totalling $119.3 million and a 50% drop in interest costs to $7.3 million. Operating expenses decreased from $1,476 million to $1,347 million, a healthy reduction of $129 million, but this was more than offset by a fall in revenue of $140.3 from 2015.

    Although the annual report is full of positive achievements, including health and safety improvements, marketing gains, processing investments and the ability to segment livestock suppliers, this was just the start of a long process which Alliance has embarked on. To give the company credit, it freely acknowledges this, recognising much remains to be done to retain competitiveness in the context of declining livestock volumes, particularly in its main South Island catchment areas.

    The 2017 financial year will provide a better indication of how Alliance is making progress towards preserving and enhancing its status as the only wholly farmer owned cooperative and leading New Zealand sheep meat exporter.

    It may also want to use its improved balance sheet to strengthen its competitive position in the beef segment of the market, specifically in the North Island where it is under represented.

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    *Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at or read his blog here ». This article was first published in Farmers Weekly. It is here with permission.

  • The Weekly Dairy Report: National and global reductions in milk volumes is the driver behind recent dairy price lifts

    More regular rain in the dry South Island eastern regions has improved soil moisture levels and reduced the continual need for irrigation water.

    In the north things are now drying out after the big wet but the production peak passed early and milk flows are well back on many farms

    Canterbury drillers however report aquifers are still low and if the summer ahead is dry, water reserves could be tested, although in the southern regions of the province, levels have improved.

    Plentiful feed dominates  in the South Island and while the silage makers are busy, the short time between showers has made it difficult to get rain free hay.

    Nationally October milk flows are down by 6.1% on last year, and even more for Fonterra, which some analysts believe shows the big company is still losing market share.

    Globally the EU's milk production fell for the fourth month in a row, in Aussie flows reduced by 11.4% in October, and with Chinese domestic production also fallng they have responded by importing 15% more milk powder due to low stocks.

    Managers at present are focusing on pasturing quality that is naturally reducing with seed head emergence, and this should be removed before rotation lengths are widened.

    The $6 forecast by Fonterra has lifted farmer confidence, but advisers urge managers not to lose the cost efficiencies they have worked hard to achieve during those tough financial times.

    Synlait has followed at the same rate after a very successful year financially, but Westlands woes continue and they faced angry shareholders this week after announcing a $5.30-$5.70/kg/ms forecast.

    The lighter stocking rates now carried will create their own challenges associated with pasturing planning, and the focus needs to be fixed on the farms performance goals.

    Up north water issues associated with the Healthy Rivers Plan change have disrupted recent rural real estate sales, as prospective buyers are wary of the new nitrogen reference guidelines and rules that may restrict increasing production.

    Rabobank NZ reports that their impaired assets are up 21% in September and will be pleased with the milk price lift, as some of the heavy indebtedness will be in the dairy sector.

  • Keith Woodford says that dairy volatility is still with us, and there is lots of uncertainty over the coming months

    By Keith Woodford*

    Fonterra’s recent upgraded estimate of $6 per kg milksolids (fat plus protein) for the 2016/7 milk price has been welcomed by everyone in the industry. Given that it is only six months since Fonterra’s initial for this season of $4.25, the current estimate should also remind us of the impossibility of predicting milk prices with any accuracy.  

    This level of inaccuracy is typical of the last three years, where Fonterra’s initial estimates compared to the final price were out by $1.40 in 2014, $2.60 in 2015 and $1.35 in 2016.

    Currently, we are about halfway through the milk season in terms of production, and most companies will have sold about half of their total seasonal production. With some forward selling, they may even be ahead of this.  It is about this stage of the season that I bring in my price-range estimate to about $1.80 (i.e. plus or minus 90c around a mid-point).

    This year I see more downside risk than upside risk relative to Fonterra’s current estimate, so I think the final price could be anywhere between about $5 and $6.80. Come the start of January, I will bring my estimate of the likely price range down from $1.80 to about $1.30. I may also shift the mid-point.

    Early in the season, it was ASB who led with the most optimistic forecasts, initially at $6.50 and then $6. They will be pleased at their forecasting skill based on current prices. However, to present a convincing argument that their success (to date) has been skill-based rather than reliant on a considerable element of luck, they would need to show they had predicted the horrible North Island spring.

    Hindsight is wonderful, and it tells us there have been three key drivers for the current buoyant markets. The most important driver has been reducing supply, first from Australia, then from Europe, and now New Zealand.

    The second driver has been increased demand for WMP at the GDT auctions from China. Most of this is not yet showing up in either New Zealand’s export statistics or China’s import statistics. It will not be until the December New Zealand export stats and the January China import stats that this will show up.  Anything arriving in China before January will stay in bond so as to get tariff free entry at that time.

    The third driver has been increased demand for butter, especially in the USA.  This is because the dairy industry has successfully convinced a considerable number of Americans (and also some Kiwis) that butter should no longer be considered a health demon. That message is less than consistent with the messaging from many health groups including the Harvard School of Public Health, but it is perception that counts.

    Despite the current dairy upturn, there is lots of uncertainty for the rest of this season. The fundamentals remain weak.

    European production for September – the last available month – was down 3% on the previous year, but European farmers are now starting to see the same price upturn as in New Zealand.

    Although European farmers are currently receiving on average only 28.3 euro cents per litre (containing 7.55% milksolids), European farmers know that the current market prices even for commodities will support a farm gate price of about 33 euro cents. This is what the European models show. The current price is due to lagged responses. Indeed, the spot price in both Italy and the Netherlands is around 42 euro cents, which equates to around $NZ8 per kg milksolids.

    Unless a European farmer plans to get totally out of dairying, then the current price signals are now sufficient to encourage more production. It will take several months for this to start flowing through.

    International dairy commodity buyers are closely watching New Zealand production.  Fonterra has sent out strong messages that production is down, and has focused its messaging around the Waikato situation. The overall New Zealand situation is less dramatic, but NZ production (all companies) was down 6.1% for October and 3.1% for the overall season to that date.

    It is clear that particularly over the last two months it has been Chinese buyers who have been bidding up the price of whole milk powder (WMP). Without that support, the price of WMP would be much lower.

    Trying to tease out the likely buying behaviours from China over the next few months is very challenging. The big Chinese dairy marketing companies are also large-scale producers and processors of milk, and they are struggling right now with their own economics of production.   

    Simple economics tells us that at current prices for Chinese raw milk at the farm gate (about 3.3RMB per litre), then it makes sense for Chinese companies to purchase WMP from New Zealand rather than to manufacture it themselves. However, the economics of reconstituting New Zealand WMP into UHT milk, which is a common use of the New Zealand product, no longer stack up relative to using Chinese raw milk for that purpose.  

    Unfortunately, simple economics cannot tell the whole story. If more imports of New Zealand milk powder lead to the price of Chinese raw milk dropping even further, then both business and social dislocation in China is inevitable. And that is not consistent with China’s desire for social harmony. There are undoubtedly complex forces at work.

    Turning to a New Zealand perspective, we know that the global demand for WMP is weak with the exception of China. Accordingly, we can say with some confidence that the WMP market, which underpins farm prices in New Zealand, will be in big difficulty again if the Chinese hold back on purchasing in the new year.

    Another wild card is the effect of European Commission selling down its stocks of skim milk powder (SMP). These stocks are currently at over 400,000 tonnes.  

    Until recently, there was quiet confidence that Europe would hang on to its SMP stocks and then eventually sell them for animal feed. But the European Commission has now said that is not the way it is going to happen. In December, they will start releasing stocks using a tender system, with 22,150 tonnes available in the first month to test the market.

    American milk production is also on the rise, with September production up 2.5% over the same month of the preceding year. With feed and energy prices low, the market messages to American farmers remain to either increase production or get out of the industry. There will be an ongoing loss from the industry of small-scale family farms, while many of the industrial farms will continue to push production.  It is called economics of size.

    Given all of the uncertainties, and when talking to farmers, I am focusing on the projected advance payments plus top-ups through to June, rather than the final payout. Fonterra is proposing that by 20 June 2017  it will have paid farmers $4.70 for milk produced in the four peak months of September to December, and $5.21 for milk produced in the shoulder months of June to August and Jan to April.  That is as far as I can see.

    In the case of Synlait, they too are predicting a $6 payout, but with $4.65 paid by the end of June.

    Residual payments will flow through in the months thereafter, but the size of them is in the lap of the gods.

    As for next season (2017/18), that is totally unknown.  However, evidence from the past is that a rapid price spike such as has recently been occurring tends to not last more than one year. In 2007/8, the milk price rose from 3.87 to $ 7.59, then dropped back to $4.75 the next year. In 2014 it rose from $5.84 to $8.40, and then dropped the next year to $4.40.  The exception was 2009/10 through to 2011/12 when the price stayed above $6 for three consecutive years

    For those who are risk averse, the 2017/18 production can currently be locked in by selling a futures contract at $6.22. But farmers wanting to play that game must not only learn the rules of the game; they must also set up a facility with their bank to cover any margin calls. That facility needs to continue through to final settlement at September 2018.

    For those who are tempted to use futures, they should never forget that it is a strategy to minimise risk not to maximise profit. It can greatly reduce the risks associated with a poor price, but it also reduces the jackpot if the physical price goes very high. It is all about trading-off an opportunity that will be foregone in return for risk avoided. It is no use feeling cheated if prices do subsequently rise. Similarly, for those who choose not to use futures, then if it is no use, if the price of the physical product drops, to then bemoan the foregone opportunity to lock-in a price.  

    *Keith Woodford is an independent consultant who holds honorary positions as Professor of Agri-Food Systems at Lincoln University and Senior Research Fellow at the Contemporary China Research Centre at Victoria University.  His articles are archived at

  • Westpac's economists see a mixed bag for the rural sector as dairy prices improve but caution remains, construction boom helps forestry & meat sector faces challenges

    By the Westpac NZ economists*

    A recovery in global dairy prices has provided welcome relief for the beleaguered dairy sector, with cash flows for most farmers headed firmly back into the black this season. While other parts of the agricultural sector have been performing better in recent times, insipid global growth and rising supply are expected to keep the prices of most commodities contained. And with the NZ dollar lingering higher, and competition heating up in many key markets, exporters will need to keep working smarter to stay competitive.

    The dairy sector has found itself on firmer ground over the past few months, courtesy of a 50% lift in global dairy prices. This recovery in prices (back to mid-2014 levels) reflects supply and demand moving into better balance, although sentiment and prices look to have run a bit ahead of fundamentals. While this makes prices vulnerable to some retracement as we move into 2017, a more balanced market should see prices remain well clear of this year’s lows. For New Zealand’s farm gate milk price, the timing of the price moves is critical. With higher prices coinciding with peak production, we’re now forecasting a farm gate milk price of $5.80/kgMS this season. And we see further improvement ahead, with a $6.10/kgMS milk price pencilled in for 2017/18.

    While a higher payout this season will see a return to positive cash flow for most farmers, we’re not expecting farmers to rush out and spend. After two seasons of negative cash flow that required most farmers to take on additional debt to carry them through, the focus will now be now on getting balance sheets back in order. But nonetheless, the outlook is certainly more optimistic than we expected three months ago.

    Clear signs around the middle of this year that global milk supply was moderating (after the previous year’s surge higher) has been the key factor lifting prices. Notably, European milk production in July and August was running 1.4% below 2015 levels, with payments by the European Commission to reduce production providing farmers further incentive to scale back supply. Australian production has also fallen sharply, as farmers grapple with low returns and wet weather. But bucking the trend has been US milk production, on track to grow 2% this year.

    New Zealand milk production has also been tracking lower, off the back of a smaller national herd and a swing back to a predominately pasture-based regime. But it was news of a soggy spring sharply lowering production in some regions that really caught the attention of dairy markets, and gave prices a second wind. While Fonterra is forecasting a 7% decline in its milk collections this season, we are not as pessimistic about nationwide supply. If anything, the sharp lift in prices helps limit downside in supply, as it encourages farmers to raise production by adjusting feed regimes. Moving into next year, we expect broader production dynamics to weigh on dairy prices. Barring a significantly dry summer, New Zealand production should be less dire than many fear, while the pace of decline in European production is likely to ease.

    Demand has also chipped in to support higher dairy prices. Improving demand has been dominated by China, with imports of whole milk powder in the year to date up 20%, while demand in the rest of Asia has remained sluggish. We see a more gradual pace of demand growth ahead, as global growth remains subdued, and as previous low prices gave buyers ample opportunity to stock up. Meanwhile, the unexpected US election result has created additional uncertainty about the outlook for global demand and commodity prices.

    A brighter hue

    It’s been a bumper year for the forestry sector, buoyed by solid domestic and export demand. Strength in domestic demand isn’t surprising given the boom in construction. But a surge in exports this year has been surprising, with record volumes of logs and timber shipped in the September quarter, while prices have hovered around record highs.

    An acceleration in demand from China, which takes the lion’s share of New Zealand’s log exports, has driven the shift in momentum this year. After treading water through 2015, real estate construction has picked up, as rapid house price growth has broadened across cities. Developments in other key export markets have also been positive. In Korea, a solid pipeline of construction has seen log demand recover, while demand from India continues to trend higher.

    With the large standing of early-1990s plantings ready to be harvested, New Zealand is well placed to capitalise on high prices. But other exporters are also eyeing up opportunities. Russia was exporting record volumes of lumber to China through the middle of this year, as producers benefit from the weak ruble and improving productivity. And with the US and Canada struggling to renegotiate a lapsed trade agreement for softwood lumber, more Canadian supply might end up on the Chinese market.

    Heading into next year, prices are likely to feel the pinch from both directions. At the same time as large suppliers look poised to increase supply, demand growth may falter as Chinese construction continues to be buffeted by several headwinds – not least, a lingering oversupply of new homes in some areas.

    Mixed bag

    Beef and lamb farmers have seen diverging fortunes in recent years. Beef farmers have benefitted from exceptionally high prices since mid-2014, as global supply has been constrained by herd rebuilding in the US and Australia following severe droughts. But with herd rebuilding in the US now well advanced, US beef production and exports are set to rise this year and next. Global production is expected to rise 1% in 2017. This would be the largest rise since 2013, and should eventually be reflected in lower prices.

    But even with global prices remaining favourable, life might become more difficult for New Zealand beef farmers, as a reduction in trade barriers increases competition in key markets. China has announced the removal of a 13-year ban on some US beef products, and the US has also eased import restrictions, with the first fresh beef exports shipped from Brazil recently.

    Meanwhile, the sun hasn’t been shining so brightly on lamb farmers. Prices have been oscillating around an average level for the past few years, as relatively tight supplies of lamb from New Zealand and Australia have been countered by subdued demand in key European markets. The fall in oil prices has also hampered demand from the Middle East, and exports to China have been very disappointing, down 17% in the year to September.

    Prices are expected to track broadly sideways over the next year as supply remains tight, although the Brexit vote has clouded the demand outlook. In the near term, the sharply weaker pound makes British lamb much more competitive in the UK and other European markets, which will weigh on NZ dollar returns. And over the medium term, access to the UK market is uncertain, with British sheep farmers likely to push for tighter restrictions on New Zealand lamb.

    While the meat sector faces numerous challenges in growing export returns (not least, the downtrend in sheep and beef numbers over time), our recent Industry Insights report highlighted several opportunities for the sector.¹ The prospect of chilled meat exports to China presents a significant opportunity, although there are a number of hoops to jump through first. Another opportunity is to create a coherent New Zealand “brand” internationally that would help “tell the story” of New Zealand products, in order to shape preferences and attract a premium price in the way that other sectors have.


    Sector Trend Current level1 Next 6 months
    Forestry Prices have held up surprisingly well, but we don't expect this to persist as international supply responds and Chinese demand moderates. high
    Wool Synthetic substitutes to remain attractive while oil prices remain low. average
    Dairy Modest retracement expected in coming months after big lift in prices since mid-year. average
    Lamb Uncertainty over demand in key markets to continue to weigh on prices. below average
    Beef Prices to be underpinned by relatively tight supply in the near term, but downside risk further out. above average
    Horticulture Benefitting from strong demand and productivity improvements. Further improvement expected heading into next year. above average

    1. NZD prices adjusted for inflation, deviation from 10 year average.

    This article was prepared by the full Westpac New Zealand economics team. Michael Gordon is the acting chief economist at Westpac New Zealand. This is the third chapter of their recent publication "November 2016 Economic Overview", and is here with permission. The first chapter is here. and the second chapter here. The next two chapters will be re-posted here, in turn.

  • Allan Barber finds the meat industry needing to adapt to unexpected changes in it export market prospects, yet still convert grass to payments to farmers fast. He sees increased challenges

    By Allan Barber*

    As if Brexit wasn’t a big enough shock, the US presidential election has really set the cat amongst the pigeons.

    Commentators of all nationalities and political inclinations have literally no idea how a Trump presidency will affect the world order, from trade agreements and global interest rates to immigration or deportation, let alone internal security issues and relationships with other nations.

    After predictions of imminent disaster, share markets have been cautiously positive and interest rates have started to rise, while there has been an initial fall in the New Zealand dollar. This has nothing to do with our dollar, but merely reflects its relative global importance; however, it provides a small but welcome relief.

    The first definite result of the Trump victory is the ditching of the TPPA in its present form with no possibility it will be signed between now and January before Obama’s term ends. This may be unfortunate, although there is enough concern about the dispute resolution provisions in the agreement that mean it may not be an unmitigated disaster. The main disappointment will be the loss of the opportunity to achieve parity with Australia for beef access to Japan.

    The end of TPP provides impetus for the RCEP agreement to be negotiated as a priority. RCEP involves 16 countries including 10 ASEAN members and the six states with which ASEAN has FTAs - Australia, China, India, Japan, New Zealand and South Korea. Negotiations were kicked off in 2012, but despite regular meetings, have not yet resulted in an agreement. But the two largest members of RCEP aren’t part of the TPP negotiations. China will now see a great chance of taking the geopolitical lead in the Pacific from the United States, while India also appears much more enthusiastic about free trade under its present government.

    Trade agreements alone will not enable New Zealand to achieve the Government’s goal of doubling exports by 2025. Two recent reports, Westpac’s Industry Insights – Meat and Wool and KPMG’s Agribusiness Agenda – have drawn attention to the urgent need to lift the game considerably to have any hope of lifting exports to the point where these will improve the country’s standard of living.

    The Westpac report focuses specifically on the sheep and beef sector and makes the interesting point productivity gains have mainly come from improvements to the sheep flock, whereas recent increases in value have almost exclusively come from beef exports. The industry suffers from commoditisation which results in products being sold because they are cheaper, not because they are of better quality than the rest of the world’s.

    This is the curse of being a farming country with plentiful grass at the bottom of the world which has to export between 80 and 90% of its output. The main role of meat exporters is to process farmers’ livestock and achieve the quickest and best price available, so they can pay a competitive price for it within fourteen days. This isn’t consistent with achieving a premium for a high quality, luxury product. Under present circumstances consistent annual gains in export returns just won’t happen.

    The report suggests further productivity gains will be hard to come by, so increased value must come from improving returns or cutting costs. It highlights the lack of a credible and coherent story to promote the New Zealand brand as a major impediment. The first action proposed is to tell the story that proves our grass is greener and produces better animals. The cross-industry work in Ireland under Bord Bia is a ready-made example of what can be achieved when government, processors, farmers and food manufacturers pool resources and commit to a common goal.

    Other suggested actions include better market selection, particularly for lower value parts of the animal (exporters have been doing this for years and markets fluctuate considerably), increasing chilled and pharmaceutical exports, and vertical integration by cutting out middlemen. Efficiency gains proposed include increasing farm size, rationalising processing plants, livestock transport and stock agent involvement, and reducing MPI’s inspection costs. Unfortunately none of these will result in the quantum leap needed to change the industry’s economics to the benefit of all participants.

    KPMG’s Agenda is more visionary, but probably with less relationship to reality. It proposes three alternative scenarios: ‘complacency reigns’ which implies continuation of the status quo, ‘change adopted by some’ participants and ‘being on the leading edge of change’. The first scenario implies an inability or unwillingness to adopt new technology, a reliance on the occasional good year usually when the dollar falls out of bed, and a gradual disconnection with markets and consumers. The third scenario requires compound annual growth of 4.85% if agribusiness exports are to reach $100 billion of exports within 20 years.

    The truth will almost certainly be somewhere between scenarios one and two which foresees some parts of agribusiness adopting principles of leadership, collaboration, value creation from foreign investment and a number of global brand successes. For this to occur New Zealand agriculture must gain the support of the whole community through universally excellent farming practices and the community must adopt realistic expectations of the country’s most important source of wealth.

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    *Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at or read his blog here ». This article was first published in Farmers Weekly. It is here with permission.

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