Rural

  • Allan Barber reviews the capacity and financial situation at Silver Fern Farms, concluding 'there is no alternative' to outside capital

    By Allan Barber

    Silver Fern Farms have been forced to take what CEO Dean Hamilton calls a prudent approach to livestock procurement.

    This is code for being hard up against the company’s banking facility, directly as a result of greater livestock availability.

    A longer season in the North Island and pressure from drought in North Canterbury are responsible for this situation.

    An in-house message to livestock buyers explains the company’s inability to handle all its potential livestock bookings and says it may be necessary to assist some suppliers in finding alternative slaughter capacity. The last time I can recall this happening was more than 20 years ago when industrial action forced AFFCO to get Weddel to kill on its behalf.

    Clearly SFF has taken the sensible step of implementing seasonal closures at some large plants, such as Paeroa in the Waikato and Fairton in the South Island. Unfortunately the pursuit of cost savings has clashed with the longer than expected flow of livestock, but it would be financially unsustainable if not impossible to reopen these plants.

    The other major factor is the state of the export market which is scarcely conducive to killing and processing more product than absolutely necessary at this time of year. As Hamilton told me, there is no point in filling up the chillers and freezers when the market is as soft as it is at the moment. He could well have added that the company’s bankers wouldn’t have allowed it anyway.

    The internal communication to the buyers makes it plain SFF must live within its means which hasn’t been the case for the last three or four years. The hope is expressed that this will create more flexibility next season. However the $1.3 billion spent on livestock so far this year is greater than last year which indicates the company has yet again failed to live within its means.

    Three years ago SFF suffered because it failed to meet the market which resulted in too much inventory having to be written down, causing substantial losses over two financial years.

    SFF is suffering the ultimate meat industry conundrum: how to run all its plants at optimum capacity when its bankers impose facility limits which render this difficult or downright impossible in prevailing market conditions; another dimension of the conundrum is the conflict between satisfying supplier demand for slaughter space and the inability to turn this into cash.

    The meat industry went through this scenario in the 1990s resulting in Weddel and Fortex receiverships with AFFCO only being saved by Weddel going through first and the forgiveness of a large amount of debt. This resulted in a capital restructure which allowed AFFCO to survive, prosper briefly and finally be taken over by Talley’s Group which had deep enough pockets to ensure its long term survival.

    SFF is faced with a similar set of problems which can only be resolved by a capital restructure. The shareholder group’s attempts to force a review of the potential for a merger with Alliance are doomed to fail, because the state of the balance sheet and bank constraints make a merger impossible. There are also rumours about the closure of SFF’s overseas offices.

    It appears the result of the equity raising process carried out by Goldman Sachs will finally be available for communication to shareholders in August. Unless the shareholders can come up with a minimum of $100 million, and even this may not be enough, they will have no entitlement to influence the company’s future. There may be no alternative to bringing in outside capital to recapitalise all or part of the business.

    At that point shareholders’ only option may be to express their displeasure by sending their livestock to another processor, but realistically their options may not be great.

    They may well be faced with Hobson’s choice.


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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 »

  • The Weekly Dairy Report: The market delivers another low blow at auction

    Lots of snow and heavy frosts made for a very difficult week for southern regions, as utilization of forage crops plummeted, and hay, straw, baleage and silage supplies reduced dramatically.

    While in the north floods around Wanganui brought problems with road access, pasture and infrastructure damage, and in other western areas, high soil moisture levels caused pugging issues.

    Farmer confidence has dropped to the lowest point in ten years, lead by the sharp reversal of fortunes for dairying, but a big farmer turn out at the nitrate management seminars is a sign that managers are prepared to educate themselves to the challenges that lie ahead.

    Some indication that the dairy commodity market may be reaching the bottom were seen in the latest Oceania prices, but another test will be seen in this weeks dairy trade auction.

    But hopes were dashed  last night when for the 8th event in a row the global dairy auction prices fell, led by big drops in whole milk and skim milk powders as oversupply and weak demand drove values lower still.

    With the present predicted $5.25 payout dependent on whole milk powder prices recovering to $3500/tonne by Christmas, todays rate at $$2054/tonne shows a major price turn around will need to start soon to achieve this mark.

    The currency has eased along with the fall to mask some of the decline, and financial analysts are suggesting another Reserve Bank driven interest rate drop maybe needed, but this will not stop global over supply and weak demand in China.

    Interestingly in Australia, the Warrambool Cheese and Butter dairy company announced a payout of A$6.10 ms equivalent for the 2014/15 season, a rate all NZ farmers will look on with envy, and the new seasons price converted to NZ dollars at $6.30 will pressure NZ processors further.

    Fonterra’s guaranteed milk price scheme was set at $5.25/kg/ms, and was heavily oversubscribed as farmers locked in this average return, as they decide to manage risk in this volatile market environment.

    Lincoln University researchers are planning to do a survey focusing on how farmers are dealing with debt, as the capital required to run a farming business grows, and with it increasing pressure of financial commitments.

    More results have been emerging from last years cows deaths on swedes, with Southland vets stating more occurred on the HT variety than unmodified cultivars and urge continuing care with feeding brassicas.

     

  • Further large falls in dairy prices have economists predicting that the Reserve Bank will need to make more extensive cuts to official interest rates in response

    By David Hargreaves

    ASB economists are now picking that the Reserve Bank will completely unwind last year's interest rate hikes by October; that is they pick a further three consecutive cuts in rates between now and then.

    And ANZ's economists also now think the RBNZ will drop the Official Cash Rate by a further three-quarters of a percent, but they pick the final reduction to 2.5% will take place in March.

    The sharp re-evaluations from bank economists follow another dire night for New Zealand's dairy industry, with prices in the latest GlobalDairyTrade auction falling by 5.9%. Wholemilk power (WMP) plunged 10.8%.

    That's the eighth consecutive fall in dairy auction prices, and the sharpest drop since the April 1 auction, taking prices to six-year lows. Last night's falls dashed hopes that prices might be starting to stabilise.

    The latest result must put in jeopardy Fonterra's forecast milk price of $5.25 per kilogram of milk solids for the 2015-16 season, which had been seen by the market only weeks ago as a conservative estimate. ASB has now dropped its milk price forecast for this season to just $5 from $5.70.

    ANZ, the country's largest dairy lender with about $11.3 billion loaned to the industry, is going even further and is now picking a milk price of just $4.50 for this season, down from its previous pick of $5-5.25. The breakeven point for farmers varies according to individual circumstances, but around $5.50 is often cited as a typical breakeven figure. If the economist's forecasts are right this will be two consecutive seasons of well-below breakeven returns.

    Meanwhile Fonterra, which recently foreshadowed the axing of "hundreds" of jobs from its head office and support functions, had meetings of staff around the country yesterday. And today the company issued a non-committal statement, with no reference to overnight global developments, saying that it would "provide an update on the impact to its business structures following completion of consultation, which is expected later in July".

    The New Zealand dollar was down about half a cent against the American currency overnight and has continued to slide today. The currency doesn't tend to react to dairy price movements as such. As much as anything, the fall in the value of the dollar will probably have reflected growing expectations that our interest rates will need cutting more sharply than earlier expected, more than a direct reflection of what happened in the auction itself. The US currency was also strong on the back of more upbeat news about its economy overnight. A short time ago the Kiwi dollar was trading just above US67c, which is a five-year low.

    Key reasons for cuts

    ASB economists have been close to the action in terms picking interest rate moves this year. They were the first of the big banks to publicly pick that there would be rate cuts. In a brief note issued this morning chief economist Nick Tuffley said the key reasons why the economics team were now picking three more interest rate cuts by October were:

    • Weakening business confidence
    • Weakening consumer confidence in dairy-focussed regions
    • Weak overnight dairy auction
    • A revised view to a slower recovery in dairy prices

    "There are some uncertainties around when or if the last cut will be delivered.  The NZ dollar has already fallen substantially, and will also help prop up the economy and inflation.  And, low interest rates are already fuelling the housing market - further interest rate cuts will compound that strength (and macro-prudential concerns)," he said.

    Tuffley and ASB rural economist Nathan Penny said the falling NZ dollar was partly offsetting some of the dairy auction price falls, but not by enough to prevent their downward milk price forecast revision.

    "That said, we still view dairy’s long run prospects as largely positive.

    "...The underlying demand growth from markets such as China is still there, but for the moment is being swamped by large (and mostly cyclical) increases in supply."

    Among the big banks, ANZ economists have also been in the money in picking, particularly the timing, of interest rate action this year. They had recently picked a low-point for the OCR of 2.75% late this year, but now think a 2.5% bottom is likely - and they pick March for that.

    ANZ chief economist Cameron Bagrie and rural economist Con Williams said the global dairy market was struggling to digest larger seasonal volumes from New Zealand, with many buyers’ immediate requirements covered.

    'Little on the horizon'

    "There is little on the horizon to suggest there will be a meaningful turnaround in international powder prices anytime soon."

    They said that while the NZD/USD "is adjusting lower to the continued rout", dairy companies’ hedging policies meant the full benefit of a lower currency wouldn't all accrue to the 2015/16 milk price.

    "At present we expect hedging will be around the early NZDUSD 0.70’s and given our expectations for milk powder prices this translates into a farm-gate milk price around the mid $4/kg MS mark. While cash-flow constraints are largely locked-in for farmers for the next 12 months, further forecast downgrades will extend these restrictions well into the start of 2017. This will of course further impact on confidence, investment, spending etc."

    It was now clear that additional RBNZ monetary policy action (above and beyond previous expectations) was warranted. Bagrie and Williams said.

    Worsening terms of trade

    "At the June MPS [Monetary Policy Statement], the RBNZ felt that the outlook for the terms of trade (which it assumed troughed 13% below early 2014 peaks by the end of this year) justified around 50bps of easing. The NZD has of course moved lower since then, but the terms of trade look set to undershoot the RBNZ’s assumptions too.

    "In fact, we believe the peak-to-trough fall in the terms of trade could be closer to 20%. All else being equal, a 1%pt fall in the terms of trade has historically knocked 0.15%pt off GDP growth over the subsequent 12 months. This therefore represents a 3% headwind to the economy. The NZD move of course provides some offset, but it is clear to us the economy will struggle to achieve the RBNZ’s current 3.2% growth forecast for the March 2016 year. This is of course at a time when inflation is already low."

    The AgriHQ 2015-16 Farmgate Milk Price decreased 45c to $5.05 per kg milksolids following the latest auction. That now puts it below Fonterra’s 2015-16 milk price forecast of $5.25/kgMS.

    AgriHQ dairy analyst Susan Kilsby said it would be "difficult for dairy commodity prices to increase significantly in the coming months as the quantity of milk powder available on GDT will rise with NZ’s seasonal increase in production”. 

     'Market underestimated the fall'

    “The NZX Futures market anticipated whole milk powder (WMP) prices would fall overnight. However the market underestimated the size of the fall.

    “The last time milk powder prices were this low was six years ago. At that time demand was limited due to the Global Financial Crisis.” 

    As stated, Fonterra's official milk price forecast for the new season stands at a price of $5.25 per kilogram of milk solids, with $4.40 for the just-ended season - which compares with $8.40 a year ago.

    In its latest Financial Stability Report in May, the Reserve Bank warned that financial stress in the dairy sector "could rise markedly" if prices remained at low levels in the 2015-16 season. The RBNZ says that despite many farms being in a position to manage down working expenses, around one-quarter of dairy farms are believed to have had negative cash flow for the 2014-15 season.

    'Warning signs were clear'

    Labour's finance spokesperson Grant Robertson said the "warning signs" were clear for everyone to see, "yet the Government continues to sit on its hands as more and more jobs and incomes are put at risk. Riding the wave of commodity prices was never going to be sustainable".

    “Labour believes a responsible government would have made far greater efforts to build new industries, invest more in our regions and in Research and Development.

    “National has squandered the opportunities of recent years and continues to deny the reality of an economy that is going from a stumble to a stagger,” Robertson said.

    This is the full statement issued by Fonterra:

    Fonterra Co-operative Group Limited today provided an update on the business review it announced in March this year.

    Fonterra Chief Executive Theo Spierings said the purpose of the review is to ensure that Fonterra is best placed to respond to a rapidly changing global environment.

    The initial phases had looked at the entire business in detail and had identified potential areas, including significant initiatives in procurement, business operations and working capital, where the Co-operative can unlock increased value for its owners.

    The Co-operative’s leadership is now building these opportunities into defined plans that will drive further improvement across the business, allow Fonterra to fund its growth strategy and deliver stronger results.

    “We have the right strategy and the long-term future of dairy is sound, however the world is changing and global dairy markets are increasingly volatile. To keep ahead of the game, we need to be more agile, reduce costs and generate value,” he said.

    As part of the review, Fonterra has begun consulting staff on proposals to streamline its business structures. The consultation is being conducted globally starting with the Co-operative’s procurement, finance, information services, human resources, strategy and legal functions. Other parts of the business will follow in the coming months.

    Fonterra will provide an update on the impact to its business structures following completion of consultation, which is expected later in July.

  • The Sheep Deer and Cattle Report: Prospects improve for deer, beef and wool but sheep meats struggling

    DEER

    More venison schedules lifts as processors report frozen stocks are now moving more freely, and chilled interest  is positive with early orders.

    With low stocks and falling breeding numbers, prospects of shortages are likely, but industry planners will be wary of unsustainable price lifts that history has shown caused damage to sector growth.

    Their goal is to reshape the traditional venison schedule price curve, by keeping the highs for longer by expanding out of season chilled sales, and lifting the lows by adding value to lower priced cuts.

    A surge in interest of farmers wanting to join the advanced party concept show producers are keen to look at new ideas to improve profits within their business, and this is an integral part of the Passion2Profit program.

    The new direction for the velvet sector is the healthy food market which now is consuming 20% of the product, but producers need to grow this share further, as still the largest part is commodity driven and subject to supply pressures, and reports reveal the some growth maybe returning from Chinese velvet farmers.

    LAMB

    A small lift this week with lamb schedules but market concerns remain, held back by good domestic production by UK and Chinese farmers, resulting in very slow sales to these important export destinations.

    Schedules are now 80-90c/kg back on where they were last year, and with little prospect of much of a spring lift and farmer confidence plummeting.

    Some behind the scenes action in the two co-operatives, as shareholders work at getting sufficent numbers to enforce a special general meeting, with a goal to direct the directors and CEO's of both companies to seriously discuss cost savings from a merger, as suggested in the MIE funded report.

    The agenda in the Red Meat sector conference in early July suggests some in the sector believe the status quo is the future, but with sheep numbers dropping 1million a year for the last 20 years, and present returns under the cost of production, most believe a new approach is needed for survival.

    Scanning rates in the drought areas have been back by at least 25% for the reduced numbers of ewes kept, and concerns about how these animals are going to be fed in the spring has seen share farming proposals suggested,  to prevent some of these animals from being culled.

    Good in lamb ewes have been traded for over $100/head in saleyards but store lamb prices have failed to lift reflecting poor prime lamb prospects.

    Managers are being urged to use scanning and body condition scoring to target the efficient use of scarce winter feed, in the run down to lambing.

    WOOL
     

    The last sale of the season was a double island event that saw a good clearance with firm prices for all indicators except fine crossbred, which eased back from it’s recent strong price levels.

    Season average prices rose for all micron levels except merino, with the star in the stable being lambs wool which lifted 128c/kg clean on last year.

    Merino NZ reports that in the last 2 years merino contracts have earned producers $23 million dollars ahead of the spot market, and encourage producers to look long term in their vision for wool.

    BEEF


    Beef schedules lifted as the currency eased again, and the early kill reduced supply of killable animals for the chilled market.

    Processors report both NZ and Australia will fully utilize their quota volumes into the US market for the first time in 5 years, as demand in that country has been driven by a shortage in domestic supply.

    Prospects look good for rising prices in the spring when shortages of quality animals could occur, and store animals at saleyards which will finish before christmas are already attracting  premium prices.

    Ospri announced they now have a goal of eradication of TB in NZ deer and cattle herds by 2026, and have opened submissions for stakeholders to contribute to the plan.

    Bull sales have been buoyant with strong prices, and one stud Angus bull sold for a record $100,000 to top the market.

     

     

     

  • Tim Groser: The future of global trade: US and NZ as partners in the Asia Pacific: Completing the TPP negotiation

    By Tim Groser*

    I would like to thank our two co-chairs, the Hon Simon Power, Chair of the NZ-US Council and Stu Van Soyoc, President of the US-based counterpart organisation for assuming joint responsibility for the Partnership Forum. I think it is a great idea for us to get together once a year with Government, media, business and other stakeholders to take a helicopter view of the relationship.

    The United States is still the indispensable global power – indeed, the United States defines the essence of hard power. And from our side of the Partnership, I think it is fair to say that from time to time New Zealand has also shown in international social, political and economic affairs, a capacity to be an ideas factory. Taken too far, as it regrettably sometimes is, this claim becomes gross self-deception. It appears this has been a problem for some time. One hundred years ago, a French political commentator, Andre Siegfried, wrote –

    Many New Zealanders are honestly convinced that the attention of the whole world is concentrated upon them, waiting with curiosity and even with anxiety to see what they will say and do next.

    But when the ideas are professionally, rather than breathlessly, articulated and have a wider currency than just ‘made-to-measure’ for New Zealand interests or views, yes, we have been able to marshal soft power effectively. And if ever there were a project in the economic sphere that exemplifies an effective partnership between US hard power and NZ soft power it is TPP, the Trans-Pacific Partnership. It is not by chance that New Zealand is the official Repository, or Administrator, of TPP.

    The first block was laid down by New Zealand proposing in 1998 to Singapore an FTA as a possible bridge to what we called P5, or Pacific Five. However, the central idea was not to create a bilateral deal just between two small and already open economies, but as a first step towards a wider, regional FTA that we called P5, or Pacific Five. Crucially, we identified the United States as its engine room representing North America with the other Members being from the Pacific, Asia and Latin America – in other words, the four geographical corners of the APEC footprint. If we could pull that off, we figured at the time, we would simply see where it went from there in the wider APEC context.

    There was no timetable or ‘road-map’ of the type beloved by generations of Geneva negotiators who invest such unwarranted faith in the false precision of such procedural devices. As the great 19thCentury Prussian General Von Moltke famously said – ‘no battle plan survives the first encounter with the enemy’. A more effective strategy, I think, is to maintain a core idea and then improvise around it as the political facts on the ground, and therefore opportunities, change. Frankly, I don’t know any other way to negotiate in the real world.

    Like so many strategic trade initiatives, we had a few false starts and twists and turns – but the original strategic vision always remained intact. As always, this had to be sustained through shifts in the electoral cycle. Over the years in New Zealand, three Prime Ministers, several Ministers from different sides of the political fence and many NZ officials have contributed to this project and I do want to acknowledge the huge collective contribution of them all. Countries whose major political parties are incapable of forging a core shared idea on certain issues in Foreign Policy theatres like this are condemned to be marginalised.

    The project became supercharged only when President Obama decided in 2010 on his way to the APEC Leaders Meeting in Singapore to use P4, or Pacific Four, as the base of his and his then Secretary of State Hillary Clinton’s ‘Pivot to Asia’. P4 became P7 – Australia and others immediately wanted a seat around the table when the US sat down and put some chips on the table for the first time. It then became P9, got renamed TPP, or Trans-Pacific Partnership, and at Los Cabos in Mexico at the G20 Summit became a 12 country negotiation when Canada, Mexico and Japan entered TPP. We are now ready, ladies and gentlemen, to complete it.

    The US Cavalry Arrives

    But to complete TPP, we first had to wait, continuing briefly with 19th Century military metaphors, for the US cavalry to arrive in the form of TPA – or Trade Promotions Authority. And what a tense few weeks it has been, as we watched the most important of all Parliaments – the US Congress – do its business.

    I know it is an old US political joke, but as I watched the extraordinary ebb and flow of the process both in the Senate and the House I could not help but recall the saying that

    ‘Making laws and making sausages are very similar. The public will generally consume the final result, but you wouldn’t want them to watch exactly how they are made’.

    Alternatively stated, democracy is a very messy process.

    I know many US political leaders, including leading Republican Congressional leaders, played a vital and extremely responsible role in getting this through. But I do want to put on the record our thanks to the indefatigable efforts of US Trade Representative Mike Froman, and the team he leads.

    We were never going to start the endgame of the TPP Negotiation without the US Congress providing the requisite authority to the Administration in the form of Trade Promotions Authority. The stakes of a successful outcome were high, not just for those of us who know that a liberal, well regulated trade and investment regime serves the interests of small countries like ours. The strategic stakes were also very high for the United States.

    I do not think it is an exaggeration to say that if the representatives of the United States people, namely, the Members of the 114th US Congress, had not backed the President’s Trade Strategy, not only would the US ‘pivot to Asia’ have been effectively shelved at least in the economic area for some years to come, but it would have meant the near certain failure of the other arm of US strategic trade policy across the Atlantic – TTIP, or the Trans-Atlantic Trade and Investment Partnership between the United States and Europe. Further, with the WTO teetering towards the WTO Ministerial Meeting in a few months’ time either with a very small result after thirteen years of negotiations or literally nothing to show for the effort, I am not sure what options the United States would have had to advance its agenda.

    Under that scenario, New Zealand, Australia and other close friends and collaborators of the United States would not have sat on their hands watching what was then going to happen inside the Beltway. No, we have had only too recent an illustration of what would have happened in the field of international development finance to know that would never have happened.

    Without going into the political entrails of the extraordinary developments around the Chinese led Asian Infrastructure Investment Bank, or AIIB, we would have gone ahead with our trade and investment agendas without the participation of the United States, at least for some years. Clearly, that would not have been our wish, but that is exactly what has happened in the case of the AIIB and it would have happened here. We have our own interests to protect and enhance and we take the world as it is, not as we would wish it to be.

    US and China Economic Leadership – Some Reflections on Trade and Climate Change

    It is perhaps appropriate to state our position on the very sensitive matter of US and Chinese leadership in the early 21st Century in international economic matters because it has become part of the TPP debate, including in China and the United States.

    First of all, and specifically with respect to TPP, we reject completely the proposition that TPP is some type of ‘China containment’ strategy. At least one Australian Trade Minister and I have said in public, neither Australia nor New Zealand would be part of TPP if it became a ‘China containment’ strategy. For years our model has been open regionalism.

    Indeed, we absolutely do not exclude the longer-term possibility of China becoming party to TPP in some later iteration of TPP or some later evolution of TPP into something we cannot quite envisage today. I have had many discussions of an informal nature with senior Chinese officials on TPP that lead me to the conclusion that while this is not a current possibility, it cannot be excluded.

    Further, New Zealand, Australia, Singapore and others are also involved in another mega-regional Trade Negotiation called RCEP, or Regional Comprehensive Economic Partnership Agreement. This is a negotiation involving 16 countries that currently includes China and not the United States. I leave for an RCEP Trade Ministers’ meeting in Kuala Lumpur in a couple of weeks’ time. It is not as mature as TPP but is making some progress.

    Finally, we see all these efforts as ever-increasing and broadly consistent concentric rings of trade and investment integration that point towards the ultimate vision that all APEC economies and their Leaders have accepted – an APEC-wide FTA. Whether we will ever quite get there or when, I have no idea. But this is the strategic vision unifying these various negotiations and bilateral FTAs of the type that all TPP partners have with non-TPP economies.

    I will not comment on broader political, military or strategic matters involving Beijing and Washington because it is not my responsibility to do so. But sticking within the theme of US-China leadership in the international economic arena, there is a very interesting counterpoint model in the field of Climate Change.

    First, while I have no time today to elaborate on this, members of this Forum would, I am sure, be interested to know that the partnership New Zealand has with the United States is at least as close on climate change as it has been on trade for decades. The NZ proposal on one of the most sensitive issues in the negotiations - the legal form of the proposed new Comprehensive Climate Change Agreement - is clearly the most realistic solution available for the United States, given certain political realities US negotiators have to take into account This has been acknowledged in so many words by my colleague, Todd Stern, the US Special Envoy on Climate Change. I should add quickly that it is also clearly consistent with Chinese political interests and I have had excellent discussions with Chinese Ministers and officials on exactly this point.

    But my reason for mentioning climate change is a broader political point and it is about US-China leadership on international economic issues. It is, in my view, very difficult to over-estimate the strategic significance of the bilateral US/China Agreement on Climate Change, announced jointly in Beijing last November by President Obama and President Xi.

    This will help enormously in a diplomatic and negotiating sense towards getting an international consensus – to put it bluntly, China is now politically invested in the success of Paris. It obviously also matters enormously in a material sense. After all, the United States and China are together responsible for more than one third of global emissions.

    In the ongoing debate over 21st Century global governance, where multilateralism seems so difficult to advance without the United States any longer playing the role of a single hegemonic power as it did so effectively after World War II, we have looked to forums such as the G7 for more collective political leadership. Then there was briefly the G8, which fell apart after the annexation of Crimea and consequential and ongoing repercussions in the Eastern Ukraine. For about a decade, we have looked to the G20 to provide leadership, since clearly the day has long since passed when developed countries alone can point the way forward. The essential problem is that the habits of shared responsibility for ‘the system’ are not ingrained.

    These groupings all no doubt have their place and will of course evolve, but for those of us outside the central corridors of power, we need operationally effective results, not just communiques, to point the way forward for the broader international community. And we see that in climate change, this is the world of the G2 – convergence on crucial matters between Washington and Beijing. We welcome it and in the early 21st Century I would say we need more of it.

    Before I conclude with some reflections on how we are going to close the deal on TPP, I want to go back to fundamentals: the case for open economic markets.

    The Benefits of Trade and Investment Integration

    At one level, I consider it is disturbing that the case even needs re-stating. But clearly it does. Consider the sound and fury surrounding TPP in various countries as carefully stage-managed leaks of supposed current TPP texts take place. Consider the torturous process of getting Trade Promotions Authority (TPA) and the difficulties the President had marshalling sufficient support within the US Democratic Party – not a new problem of course, as those of us who remember what happened to Fast Track Authority in the House of Representatives during the first term of President Clinton’s Presidency.

    First, the case for open trade policies starts with economic theory. Please don’t switch off – I do recall Keynes’ famous observation that:

    “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back”

    To avoid unnecessary speculation, and since I am catching a plane this afternoon to go to Peru for the Pacific Alliance Summit, let me assure you that I cannot off-hand think of any ‘madmen in authority’, let alone ‘academic scribblers’ in either of our two countries working on the politics of trade. Thank heavens.

    The core intellectual idea underpinning trade liberalisation is the theory of comparative advantage, formulated almost 200 years ago. There have always been outlier economists who question it, or posit special conditions, under which it might not work; there always will be a few sceptics, as in any field or academic discipline. Similarly, one recent survey in the United States estimated that there are about 3% of highly trained and reputable climate change scientists who do not believe anthropogenic greenhouse gases are a leading cause of climate change, compared with 97% of climate change scientists who do.

    Back in the world of economics, certain sceptics of trade liberalisation, like the Cambridge University mid-20th Century Marxist economist, Joan Robinson, are formidable minds, not ‘academic scribblers’. But such thinkers are marginalised.

    All in all, the underlying theory of comparative advantage is generally considered the most widely shared foundation theory in economics. In one recent survey I read, it was described as “an unassailable intellectual cornerstone”. For those like me who were educated in economics in the 1960s and 1970s, the man who wrote the basic undergraduate text we all started with right around the world, Paul Samuelson, called the theory underlying liberal international trade -  “the only proposition in social science that is both true and non-trivial”.

    OK – you don’t like, or choose to reference, economic theory? You feel it would embarrass you in the pub to acknowledge any interest in theory? You would not pass the Tui Ad test? You are one of Keynes’ practical men or women? Have I got an empirical study for you!

    Well, actually I have a compilation of over 150 empirical studies analysed by experts from the OECD, WTO, UNCTAD, the World Bank and the ILO – in fact 10 international organisation in total produced the most comprehensive and collaborative study of the empirical evidence that I am aware of - and I have been following this issue for 40 years. It was published in 2012 and called - ‘Policy Priorities for International Trade and Jobs’. Here are the key findings.

    • First, consider the evidence for developed countries. Of the 14 main OECD multi-country econometric studies undertaken since 2000, all 14 have concluded that trade plays an independent and positive role in raising incomes.

    • Second, the evidence for developing countries leads to exactly the same conclusion. Case studies reviewing the experience of the 12 most rapidly growing emerging economies over the past 60 years concluded that harnessing the power of the global economy was a central feature common to all and that there was what they called ‘overwhelming’ evidence that trade played an essential role in raising incomes. Sorry guys, the North Koreans got it wrong. The South Koreans got it right.

    The final concluding comment of these international experts is dripping with irony. Normally, international officials don’t do irony; it takes extreme frustration to drive experts to use ironic humour. Listen to their words:

    “Despite all the debate about whether openness [on trade] contributes to growth, if the issue were truly one warranting nothing but agnosticism, we should expect at least some of the estimates to be negative…The uniformly positive estimates suggest that the relevant terms of the debate by now should be about the size of the positive influence of openness on growth….rather than about whether increased levels of trade relative to GDP have a positive effect on productivity and growth”.

    I can of course understand vested interests who oppose trade agreements. If, say, your family owns an inefficient sugar processing plant in the wrong part of the United States and which survives only because of sugar subsidies and high protection, I get it. What you need is a long time to adjust to competition, sweetened by a good dose of adjustment assistance. You may even surprise yourself by what you can do to improve your competitive position over a long period of time – I could take you to dozens of examples in this country of industries and companies which vigorously contest our first liberalisation moves in the1980s, staring with the NZ wine industry which used to be deeply protectionist and for understandable reasons. But I am zeroing-in here on the anti-trade, anti-globalisation ideologues who are present around the globe. Even in Germany, a post-war bastion of the open trading system, they have become quite recently a growing element of the political debate on trade. This will complicate the TTIP negotiation.

    Here in New Zealand we have anti-trade activists who are relentlessly consistent: they have never supported a single Trade Agreement and they never will. They are politically irrelevant to my political party. However, they get an enormous amount of airplay and are not politically irrelevant to other important elements in our democracy. For reasons I explained earlier, I believe broad bipartisan support for open trade strategies is vital to avoid your country being marginalised.

    There is no point in asking them to explain how on earth New Zealand could have survived, let alone prospered, without CER, without the Uruguay Round, the China FTA, the network of FTAs that New Zealand has with ASEAN countries – they opposed even the Singapore/NZ FTA, the first building block of the DNA of TPP. To paraphrase a well-known quote of our Prime Minister, are we meant to earn our living just be selling to ourselves?

    There is no point in asking them to explain this, because this is not an evidence-based fight. This is about ideology and the role of markets. On a purely personal note, and going back to my political past in the late 1960s and on which I will not elaborate, I understand exactly how and why these people think like this. I recall wistfully an old political doctrinal statement ‘The final battle will be between the socialists and the ex-socialists’.

    If it were just these anti-trade activists, they could be safely ignored by everyone. But their modus operandi is to give currency to concerns about policies that middle New Zealand, which is anything but ideological, cares about – and then to exaggerate those concerns out of the park.

    Happily, those concerns of middle New Zealand are widely shared starting with me, my colleagues in Cabinet and Caucus and the Kiwi voters who elected us. And as I survey the likely landing zone for these issues, I am extremely confident that our negotiators, who are world class, have done an excellent job. We shall be able to defend our position.

    So, to put it bluntly, we are not going to sign up to poorly constructed ISDS provisions that ‘transfer control of the country’s sovereignty’ to foreign corporations. We are not going to sign up to agreements that undermine a central pillar of our Public Health system – the pharmaceutical purchasing agency called Pharmac, which is used to keep the cost of medicines very affordable for middle New Zealand. We are not going to sign up to agreements that stop this or future Governments putting well-designed environmental protections in place. We are not going to sign up to provisions on ISPs that make every mother in Lower Hutt worry that the TPP electronic police are going to fly in from Houston to cart their 16 year old son off to jail for file-sharing with his girlfriend.

    If and when we get TPP in place, extreme claims that the sky is going to fall in will be made, irrespective of a balanced and sober reading of the final agreed TPP texts. It will be ground hog day for Chicken Licken. I recall, for example, at the end of the Uruguay Round where I was our chief negotiator, absurd claims that the Uruguay Round TRIPs agreement would ‘destroy the Maori economy’, in spite of the fact that the vast bulk of Maori assets, today valued at $40 billion, are in the export sector with much to gain from the Uruguay Round.

    That exciting new dairy export company near Taupo called Miraka, the Maori name for milk, that combines significant Maori business assets, locally available renewable geothermal energy and overseas capital invested in it, simply would not exist without the Uruguay Round export subsidy disciplines that allowed our dairy industry to grow against grossly unfair competition, along with the more recent FTAs that created markets and created the interest of Asian investors in investing in New Zealand’s future alongside our own people.

    Closing the Deal

    Now that Congress has spoken, it is show time. I have learned never to be dogmatic about time-tables, but the scenario that I and my negotiators are working to is that we have to get the basic political deal done by the end of July, including finalising all the chapter texts, leaving only legal rectification by experts to be done thereafter.

    The deal is ripe for the picking politically, which does not mean it will be easy to reach up and pick nice ripe fruit without damage. I have been deeply involved in the endgame of some pretty significant international negotiations over the last few decades and sometimes it isn’t very pretty. If I told true stories of what I have seen – right up to and including fist fights and negotiators sobbing over the phone, I really don’t think people would believe me.

    So please remember this: nothing is ‘too big to fail’. Nor can I be 100% sure that all twelve countries will arrive on the right page at the same time. The one thing I can say with near certainty is that in the course of the endgame, something will come out of left field that we knew about but which no-one had seen before as a deal-breaker. Anyone involved in settling the last major political fight in the Uruguay Round, which was over audio-visuals, would have anticipated that that issue would be last deal-breaker that needed to be resolved. Even then, technical negotiators in services were still arguing with each other when the bell rang to stop.

    But I think we will get there – metaphorically, I have called it in some interviews a 7/10 probability. It is not going to be a perfect deal – there never will be a perfect deal because compromises are now required. From a New Zealand point of view, the assessment my team of negotiators, led by Dr David Walker, and I have made and conveyed to other Ministers including the Prime Minister is that there is potentially a landing zone for a good deal that will indeed shape the future of trade and investment integration in the Asia Pacific region and quite decisively.

    I would be much more positive in public than this, but for the current lack of clarity on a possible landing zone for our most important export – dairy. It is not that there is nothing on the table on dairy. Nor, let me assure the deep pessimists, do I believe there is any possibility of dairy simply being ‘excluded’ simply because it is too sensitive. That of course would take New Zealand right out of TPP. The issue for us is the quality of the deal on dairy and it is nowhere near there yet.

    That will change because it has to change. People have not been putting their real cards on the table until they knew they had to. And until we heard from the US Congress, they were never going to do that. It is going to be an interesting few weeks.

    Ladies and gentlemen, if the negotiators representing the 12 countries involved in TPP – almost 40% of global GDP – can pull this together, it will indeed be a big deal. Andrew Robb, my Australian counterpart, calls this ‘the biggest trade deal since the Uruguay Round’. I think he is right. And if we can do it, the TPP bus will not stop finally at the Tokyo station – Japan being among the last TPP entrants. TPP will indeed shape the future integration of the region and possibly strategic thinking elsewhere.

    The future for New Zealand is not to shut up shop, to be fearful of foreigners, foreign investment, even targeted migration and suspicious of all Trade Agreements – my word, it must be so depressing to be part of the anti-trade movement. We need to engage with the world. We should back ourselves. We have every reason to be optimistic about our place in the world in the first quarter of the 21st Century. Concluding a high quality TPP Agreement is part of that future.

    ------------------------

    Address by the Hon. Tim Groser, Minister of Trade and Minister of Climate Change Issues: US/NZ Partnership Forum, Auckland 30 June 2015

  • Lincoln University leadership in turmoil as Andy West quits. Annual report overdue

    The leadership at Lincoln University has been suddenly thrown into turmoil by the sudden resignation of the Vice Chancellor, Andy West on Friday.

    His tenure there has been dogged by priority conflicts with teaching and research staff as he moved to reorient the University.

    And the insitution has been a very heavy user of consulting advice.

    The University's Annual Report is late and overdue.

    This is the media statement put out by the University:

    Dr Andrew West today resigned as Vice-Chancellor of Lincoln University.

    “I am proud of what the University has achieved under my leadership. It has been a fabulous three years and Lincoln is on track to become one of the world’s truly great land-based universities”, said Dr West.

    “However my commitment of time, energy and focus has been so great that it is now appropriate that I refocus on my family that live in the Waikato and on my very elderly parents that live in England”, Dr West added.

    “I want to wish the University every future success. It is a fabulous place to study and I’d encourage any young New Zealanders interested in careers in the country’s most important industry to enrol there”, said Dr West.

    The University’s Chancellor, Tom Lambie, acknowledged Dr West’s significant contribution.

    “In the past three years under Dr West the University has focused on its land-based specialisation through qualification reforms, revitalisation of capability, in-principle investment of $100m by Government in Lincoln, and growth in student enrolments”, said Mr Lambie.

    “The University wishes Dr West well in his ongoing career in global agri-business and looks forward to continuing collaboration with Dr West in the future”, added Mr Lambie.

  • Keith Woodford looks ahead to see how dairy farmers will adjust to the regulatory, environmental and economic pressures in their industry and still be able to prosper

    By Keith Woodford*

    Right now, everyone in the dairy industry is figuring out how to get through the next 12 months without too much pain. But eventually events will turn and we will be able to think more strategically about where the industry is going.

    Down on the farm, the big long term issue will be how to remain profitable while living in the new world of nutrient emission limits.

    There are two ways to go. One is to farm within an all-grass system, but pull back the stocking rate and other inputs such as nitrogen fertiliser and supplementary feed. Some of the environmentally-focused people are arguing that this is the way to go, and within industry organisation DairyNZ there is a strongly held viewpoint that all-grass is where our competitive advantage lies.

    A key limitation of the all-grass system is that even with considerably reduced stocking rates there will be considerable nitrogen leaching. This is an inevitable outcome when a cow drops nitrogen-laden urine at high concentrations. In spring and summer, the urine spots do not cause great problems. However, with autumn-dropped urine there is insufficient time for the nitrogen to be absorbed by growing pasture before being leached away in winter.

    Particularly in the South island, the so-called all-grass system actually relies on considerable quantities of forage crops – traditionally swedes and turnips, more recently kale, and now increasingly fodder beet. When fed in-paddock, the nitrogen leaching can be extremely high.  Much of this occurs with dry stock on runoff blocks and therefore does not come into nutrient calculations for what farmers call the milking platform. However, when considering the total system, and doing so on a catchment basis, then leaching from these wintering blocks is a big problem.

    The only way to solve these problems is to get the dairy cows off-paddock for the second half of autumn and throughout winter. Depending on the region, this is somewhere between 90 and 150 days. But going down that path leads to other controversies. By getting cows off-paddock there is no doubt that we can much better manage the nutrient situation.  However, we also have to manage animal welfare, odour and costs. 

    Animal welfare is particularly important but there are solutions. Cows like being in a barn as long as they have freedom to move around, and somewhere soft to lie down. That means either rubber mats, straw, wood chips or sand. All cows need to lie down for at least 8 hours per day, and the herd average should be closer to 11 hours.

    The internationally-proven free-stall design satisfies these welfare criteria. However, this is not achieved with some other designs which we have been seeing in New Zealand. The free-stall design also keep cows relatively clean and is therefore suitable for lactating as well as dry cows.

    Terminology can be important and talk of cubicle-farming quickly raises public concern. The free-stall system does have cubicles, but a much better term would be ‘cow beds’. Within the free-stall system, the cows are totally free to choose their own bed and to come and go as they like. The side rails ensure that the cows lie in the correct direction so that when they do stand, some 90% of the dung and urine falls out into the central laneway, from where it is removed by mechanical scrapers.  People in the industry should never refer to ‘cubicles’ because of the false connotations they have for the uninformed.

    The odour associated with these systems is not so much from the barns themselves, which have little smell when properly managed, but occurs when the nutrients are spread back on the paddocks. Essentially, the rest of the world seems to have solved these problems and it would be surprising if we cannot develop satisfactory solutions for New Zealand. 

    Accordingly, the one big issue to be resolved with barn-systems is the economics. Can we be internationally competitive in the dairy industry if we go down that path?

    If we are going to make barn systems work in New Zealand, then it will be based on unique New Zealand solutions.  Some farmers are already choosing fully-housed systems and are convinced they can make these pay.

    The secret to success with fully-housed cows will be management of feed costs relative to the increased production from these systems. If we simply mimic American systems with their high grain content, then we are likely to be in trouble.  Part of our New Zealand strength lies with conserved forage crops such as fodder beet, maize and lucerne which can outperform pasture production.

    Other New Zealand solutions are likely to be hybrid systems where the cows still graze pasture in spring, summer and early autumn. I expect that this is the way that most New Zealand farms will go eventually. However, we still have lots to learn about maximising profitability within these systems.

     Making these changes requires new ways of thinking and throwing out the old rules of thumb. In particular, with hybrid systems the old rules about pasture management have to change so as to still maintain high pasture utilisation.

    The cost of a top-quality free-stall system, including effluent ponds and associated infrastructure, is about $4000 per cow. On a per cow basis, that is about 20% of the overall capital cost for a dairy system. However, cows farmed within barn systems typically produce more milk and so the overall capital cost per kg milksolids may not increase.  It may even go down.  Accordingly, the key issue is controlling operating costs.

    DairyNZ has been arguing that the merits or otherwise of barn investments need to be evaluated on a net present value basis (NPV). That is all very well in theory, but the problem is that most farmers, rural professionals, rural bankers and even DairyNZ staff do not themselves have a good understanding of these calculations.

    For more than 30 years, I have been teaching investment appraisal using NPV and related techniques. On occasions I have lain awake at night and pondered whether I might be doing harm as well as good by teaching these techniques. If the techniques are not fully understood, and inappropriate assumptions are used, then we end up with wrong answers which lead to bad decisions.

    Accordingly, there is a good logic why most accountants and bankers stick to analysing the cash flow implications supplemented at times by payback periods. In the real world, cash is king and cash is something we can all understand.

    Most farmers who invest in off-paddock wintering will use borrowed funds. So the first question to ask is where the interest and loan repayments are going to come from. And the second question is what will happen if product prices crash in the first two or three years after construction. Is there a ‘get through’ survival strategy in place?

    Interest on borrowed funds is the one unavoidable cash-cost. For a free-stall barn, at 6 percent interest, this will be about $240 per cow.

    The quickest way to start getting a return on barn facilities is to milk late-calving cows through into early winter. The second way is to move to a split-calving system. Both of these strategies increase the days in milk relative to the dry period.  This increases overall efficiency of the milk to feed ratio. Better feed utilisation in the barn compared to trudging around muddy paddocks further improves this ratio.

    Fonterra now pays an additional 52c per kg milksolids for milk in the eight shoulder and winter months of January to August than it pays for milk produced in September to December.  The free-stall barn system allows more of this off-peak milk to be produced and thereby raises the overall price.

    All of these changes require new ways of thinking. Simply building a barn without also changing the overall farm management is not going to work.

    Research and development organisations within New Zealand have been slow to get involved in off-paddock systems. Rather, it is largely farmers who, through trial and error, are pushing back the boundaries of knowledge as to what can be done. Although DairyNZ is producing some good technical publications on barn design, it is not doing enough to identify the key farm management success factors. 

    Current estimates are that there are about 650 New Zealand dairy farmers with off-paddock wintering systems. These include simple non-roofed stand-off pads (which may struggle to meet environmental standards), slatted-floor tunnel-roofed structures (which may struggle with future animal-welfare standards if used for prolonged periods of the year) and free-stall barns (which are the most expensive). There is a lot to learn from those who are going down each of these paths.

    I am predicting that in 20 years’ time we will look back to the current debate with some wry amusement. We will talk about how the journey to the new dairy systems that meet environmental, animal welfare and economic criteria was more than a little tortured, but how eventually we got there. Exactly how tortuous the journey is going to be only time will tell. 

    ----------------------------------

    Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. This a regular column here. His archived writings are available at http://keithwoodford.wordpress.com

  • Allan Barber compares the prospects of two trade agreements currently being negotiated - the TPPA and the Gulf States FTA - and finds murky waters

    By Allan Barber

    There’s a lot of activity going on with trade negotiations at the moment, but not much certainty about outcomes.

    Ranging from the TPP, the grandfather of them all from New Zealand’s point of view, to the murky negotiations with the Gulf Cooperation Council, the only deal signed off this year is the long awaited FTA with South Korea. Although this FTA is good news for our primary sector, it is only a comparatively minor achievement which should have already happened years ago. Even the much vaunted FTA with China appears to have been gazumped by Australia’s more recently signed agreement.

    Getting agreement on TPP between all the signatories is a bit like the efforts to keep Greece in the Eurozone and, in spite of the US Senate’s vote to approve the fast track bill last week, there is still much detail to be resolved before all the parties can agree. In Trade Minister Tim Groser’s words yesterday the hard work is about to start, because detailed negotiations can only start when the USA is committed to the deal. It seems now, ironically with the support of the Republicans instead of the Democrats, this will actually happen.

    From New Zealand’s perspective there is still a hell of a large volume of water to flow under the bridge before the TPP meets our requirements.

    Groser says he is pleased with progress on such important issues as protection of intellectual property rights and Pharmac, but acknowledges dairy is still far from being resolved. That is an understatement when one considers the enormous resistance from Japan, Canada and the USA to freeing up the global dairy trade.

    If Groser manages to get an acceptable agreement on dairy, he will deserve the freedom of Hamilton and New Plymouth as well as a knighthood and free travel for life.

    Getting a signed agreement with the Gulf States has been dragging on since 2009 when a trade agreement was reached but never signed. It now appears the problem goes back to the ban on live sheep exports with a Saudi investor feeling aggrieved by the impact of the ban on his business.

    Now we all know trade negotiations happen mostly behind closed doors, otherwise they would never be concluded, but the apparently devious and ham-fisted attempts to get the FTA with the Gulf Cooperation Council across the line really takes the cake for Yes Minister political manoeuvring.

    The facts aren’t entirely clear, but what appears to have happened, not necessarily in the right order is this. The Prime Minister leads a trade delegation to United Arab Emirates, Saudi Arabia and Kuwait, saying the agreement is close, but needs a final diplomatic push to get it over the line; news breaks of a high mortality rate on a sheep farm in Saudi Arabia, owned by Mahmood Al Khalaf and set up with $11 million of New Zealand funding, supposedly as an Agrihub to showcase New Zealand agriculture; the deaths involve 75% of lambs born to 900 ewes exported to Saudi Arabia by Hawkes Bay farming company Brownrigg Agriculture, Mahmood Al-Khalaf turns out to be a part owner of Brownrigg Agriculture and is also believed to be the aggrieved businessman.

    Not unnaturally the opposition parties in Parliament have been trying to paint this as a Machiavellian plot masterminded by Foreign Minister and New Zealand’s answer to Machiavelli, Murray McCully. Right wing commentator Matthew Hooton says on Radio NZ National, McCully can’t survive and John Key keeps trying to blame Labour for causing a large financial liability in the first place, but can’t produce the papers to show that this was the case.

    As usual Key refuses to acknowledge there is anything amiss and McCully has gone to ground. Also, more importantly, we are still waiting in vain for this amazingly inept diplomatic push to show the positive outcome desired of a FTA with the Gulf States.

    The TAB will probably offer odds on which of these two trade agreements will come to fruition first. It’s anybody’s bet, but my money is on the TPP and Tim Groser.


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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 »

  • Keith Cooper assesses the meat industry's marketing strategies, and explains why volumes shipped to China have changed so suddenly

    By Keith Cooper*

    I have had the privilege of being involved in the meat industry for over 34 years and now the luxury of being on the other side of the fence as a farmer and observer.

    In that time I also enjoyed being part of the development of China as a market for NZ meat (and other markets ) that were not even on the radar over the 80’s when various subsidies were removed and the instalment of EU quotas occurred.

    To give some context and understanding, we should look at how the NZ meat industry developed new markets in the past.

    Two markets spring to mind, North America and Japan, both designated as markets of significant potential late in the last millennium. These markets received development and/or protection by the then NZ Meat Producers Board, with the aid of significant farmer levies - Devco - now the NZ Lamb Company owned by various NZ meat companies and ANZCo subsequently sold to private interests and Japanese customers.

    In both instances the development was controlled and non-commercially funded, albeit at a significant cost to levy payers which was ultimately to the benefit of subsequent owners who avoided all the start-up and ‘’sunk’’ costs associated with the controlled development of a new market.

    The question is, was such a model successful then or subsequently and should such an approach have been used for China?

    If so, would such a model have changed or allowed better managed development and avoid the massive surge in demand, impact on markets and the pain we are now suffering as that surge from China recedes?

    This debate can quickly get one to the fact we don’t have a co-ordinated approach to any markets as an industry, the meat exporters fiercely value their own initiatives which are packaged as points of difference to attract livestock supply – in theory this should create a ‘’vibrant‘’ meat sector.

    Important skills

    Further, as an industry, we don’t really understand the difference between sales and marketing. They are two distinctly different disciplines requiring different skillsets and separation within a business. Marketing creates demand from consumers/customers, sales however, services that demand with product, planning, logistics etc. Then of course we have traders who do just that, trade.

    Hence it is a crying shame that Beef+Lamb is considering ending meat promotional funding and thus ensuring the topic doesn’t become a voting issue in the forthcoming Commodities Levy Act referendum for on-going farmer levy support. Leadership should prevail, Beef+Lamb must continue to undertake base case promotional work on a case by case basis with companies who are prepared to co-fund, support their own initiatives in market and rightly have an influence over how their suppliers levies are spent on promotion.

    China

    Back to China - in my view and experience, the current China issue is very simple.

    The industry had been plodding away for 18 odd years with relatively low value products. The Chinese developed a PSP (Protein Supply Plan) and mandated various organisations, generally state funded and partly state owned (the equivalent to our SOE model) to source food items that had been deemed best sourced offshore, these being  products generally  requiring high volumes of water, reflecting Chinese challenges with water.

    This coincided with the economic boom in China which saw mass migration to old and new cites and an increase in disposal income, at the same time as a crackdown on internal manufacturing standards, both of which created increased demand for imported meat.

    This lead to well-funded organisations entering the meat trade with no supply chain or infrastructure distribution networks in China. The result being NZ meat was speculated on with traditional meat companies and distributors being forced to pay artificially high prices. This all cumulated with a significant inventory build in China, speculators quitting inventory and a major increase in the domestic production delivering a material price correction. 

    Accuracy of detail aside, China purchased significant volumes, tightened supply to traditional markets forcing the global value of NZ sheep meat and beef to new levels. When the tide turns (turned), it all becomes very simple, with global buyers that had delisted product being courted to relist the product at ‘’attractive‘’ price levels.

    It begs the question, would a different outcome have been achieved if China was developed under the guidelines of a ‘’development’’ market with a cohesive pan industry approach? Would that have managed the price at the time and meant a more constant global revenue stream? Would that have also meant that other markets would not have been forced to pay more on the back of the shortage caused by Chinese demand?

    Market models

    One can quickly migrate to the dairy industry model with the price discovery mechanism of the Global Dairy Trade platform. That model has not insulated the dairy sector from market forces.

    Markets are complex and by definition are what a willing seller is prepared to accept based on what a willing buyer is prepared to offer. No one is bigger than a market.

    However, is an integrated market model the answer? By that I mean a vertically integrated model where the producers produce a product to customers specifications and the customer provides a sustainable pricing return for all through the value chain : producer, processor, exporter, logistics, importer, distributor AND deliver a product that consumer can afford and is competitive with other protein or food items. So many questions!

    There have been attempts at such models, ANZCo being a good example, however it hasn’t been clear or transparent as to the true success, certainly at the farm gate value, with many such models ultimately  to competing in the procurement market rather than allowing the real value from an integrated pricing model to rule.

    A key dynamic

    Many observers and commentators fail to fully understand the dynamics of the NZ meat industry; in general, as a pastoral based system.

    We produce a crop, which gets harvested over circa a 6 month period, farmers rely heavily on that crop’s cash flow to reinvest in the next year’s crop with no clear pricing signals on which to base that next year’s investment.

    Equally, meat processors are ‘’required‘’ to process that livestock as it arrives and when farmers want the animals off the farm. Meat companies are required to finance that inventory – and maximise value (at the same time as generate cash flow to fund the seasonal influx). Now there is an oxymoron – maximise value and optimise cash flow - all in the same breath !

    --------------------------------

    Keith Cooper is the ex-CEO of Silver Fern Farms. He has been involved in the meat sector for 35 years spanning sales, marketing, leadership and governance. He is building a professional Director career and primary sector advisory based in Dunedin along with his farming interests in Middlemarch, Otago. You can contact him directly here.

  • Fonterra's June Guaranteed Milk Price set at $5.25 per kgMS

    Content supplied by Fonterra

    Fonterra has set the June Guaranteed Milk Price (GMP) at $5.25 per kgMS, the same price as the opening 2015/16 forecast Farmgate Milk Price.

    A total of 45.2 million kgMS was offered by 443 farms, more than double the number of farms that applied this time last year.

    Fonterra’s Group Director Co-operative Affairs Miles Hurrell said: “More of our farmers are seeing GMP as a financial risk management tool and are choosing to lock in a price for a percentage of their milk production.

    “We received a good range of applications from small to large farms from throughout New Zealand, who will now be able to use this income certainty to help to better budget and plan for this season.”

    Farmers had the opportunity to apply for a GMP for a percentage of their estimated production at one or more of five prices at and below the opening forecast Farmgate Milk Price. The applications totalled 45.2 million kgMS, which exceeded the 40 million kgMS available for GMP Agreements.

    Because the programme was over-subscribed, applications were accepted from the lowest price upwards with applications at $5.25 scaled back by 16.5 per cent.

    Fonterra will use the certainty from GMP to lock in longer-term supply contracts with key customers at set prices, attracting an additional premium, which can help to secure a more stable EBIT return for all farmers, paid through the dividend.

    This is the first of two opportunities to lock in a GMP in the 2015/16 season.

    The second opportunity will be in December 2015.

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