• The Sheep Deer and Cattle Report: Sheep farmers wait but beef and deer prospects look good


    Although lamb schedules are still creeping up driven by short supply for chilled orders, the frozen market issues remain, and domestic producers in the UK and Europe are pressurising retailers to use domestic product ahead of our imported supply.

    North Island schedules are now behind those in the south, as shortages driven by the early drought enduced kill has seen local supply compete aggressively with chilled export orders.

    A lack of activity from China continues as they work through their excessive sheep meat stocks, although lower value cuts are still selling well into that country.

    Early lambs are now being seen in both islands and some good in lamb ewes sold at Tinwald for $140-$150 a head, and prices for last year’s store lambs lifted on short supply.

    Some areas of the north  and deep south are experiencing feed shortages as a result of a cold wet winter, while eastern areas of both islands are still suffering from a lack of soil moisture and prospects of an El Nino summer.

    While NZ lamb producers despair at returns prospects and lack of future direction from their sector, in Australia reports reveal " lamb records set to tumble" and "sheep meat demand outstrips supply in Western Australia".

    No news yet from Silver Fern Farms capital raising proposals, but concerns about overseas capital investing in the processing industry have again resurfaced.

    Frustration amongst sheep farmers is building, while waiting for a new sustainable future direction for this sector, as dairys demise has masked the real profit problems the red meat sector faces.


    A small South Island auction saw prices firm even on the back of a slightly stronger currency, as all micron price indicators reached yearly highs.

    An “early bird” lambs wool contract was set at $6.70-$7.15 c/kg clean, to carry on this years strong demand for this young soft fibre, but high country farmers have shown present merino prices are insufficient for profitable farming, and many have switched to crossbred sheep, and more cattle as they look to improve the bottom line.


    A short supply and a more favourable currency has stimulated prime and manufacturing beef schedules to yearly highs, with bull product very close behind.

    Restocking in the US from a much-reduced herd has started, and combined with a slow down of slaughter numbers in Australia, demand for imported product from NZ should continue for a while yet.

    South Island prime saleyard steers are selling at record levels, now well above the $3/kg mark, and demand for store stock has reached similar levels.

    The challenge for traders as they replace their record returns for prime stock is they must pay similar levels for store stock, and hope the beef boom lasts the 1-2 years it will take to grow the next crop to harvest, because history has shown this upward cycle will correct downward at some stage.


    More venison schedule lifts, as processors target the early Swiss trade for chilled production, and they also report an increased interest from other European markets.

    Market comments suggest some venison contracts have exceeded $8/kg (which is well above last years spot market), and if this price could be sustained should reflect in a lift in autumn weaner prices, halt the slaughter of good young breeding hinds, and restart sustainable industry growth.

    Some early stags will be casting their buttons as they start the annual velvet growing season as producers look for more of the same from this unique product.

    At last after years of research funds, the deer velvet extract product RepaiRx, has reached the clinical trial stage with patients at Middlemore hospital using the product to test it's wound healing properties, that if successful, will create another market for this unique product.


  • Fonterra cuts product available in global auction ahead of key decisions on prices for farmers

    By David Hargreaves

    Fonterra's sharply reduced the amount of milk powder it will make available on the GlobalDairyTrade auction platform over the next 12 months prior to the next auction early on Wednesday and ahead of a crucial board meeting on Friday, which will deliberate on the forecast milk price for farmers this season.

    At the moment Fonterra's forecasting a price of $5.25 per kilogram of milk solids, but following nine consecutive falls in dairy prices in the GDT auction, the last one precipitous, the expectation is that the forecast will be significantly reduced to possibly around $4.00 to $4.25. (See here for our back articles on dairy prices.)

    Fonterra, without more broadly announcing that it would cut in its supply to the GDT (IE to my knowledge it told neither the media, nor the NZX in general, nor did it say so on its public website), issued a statement published on NZX Futures last Thursday, in which it said it was cutting its total product available on the GDT over the next 12 months by 47,800 metric tonnes (5.8%) to 800,985MT. By far the biggest reduction was in whole milk powder (WMP), with a 25,450MT reduction over the next three months and a further 20,750MT reduction between November and January.

    According to ANZ rural economist Con Williams the total reduction in WMP made available will be 9%. As some means of giving relevance to the figure, ANZ calculates that the 46,200MT tonnes of WMP involved represents an equivalent amount to the entire US export of WMP in the past 12 months.

    WMP prices have been particularly soggy in the recent GDT auctions, having dropped by a total of 20.6% across the last two auctions.

    Futures trading ahead of the next auction in the early hours of Wednesday would suggest there will be further falls in the WMP prices. The October 15, November 15 and December 15 contracts have been changing hands at -6.2%, -6% and -2.1% respectively compared with the prices in the last GDT on July 15, suggesting further falls in this week's auction. But it does need to be stressed that not all the contract dates registered trades in the last auction and, in any case, the futures prices have not in the recent past offered a wholly reliable guide to what will actually happen in the auctions.

    ANZ's Williams had this view on the week's auction: "For us another decline seems likely followed by a period of stability at low levels. The two most likely catalysts for improvement will be China increasing its purchases and/or New Zealand milk supply declining."

    In its limited-release statement Fonterra said the key factors that influenced its GDT forecasts were: seasonal changes or weather events impacting its milk supply; production, storage or supply chain constraints; anticipated customer demand from GDT and non-GDT sales channels; and differences in relative returns of products.

    "In response to current conditions in the global dairy markets, Fonterra has modified its product mix that will see a volume shift away from whole milk powder and into our other products in the portfolio. In addition, our key customers have responded to global conditions by re-shaping their purchasing profile, altering our forecast off-take profile. On the supply side we have anticipated that our farmers may reduce volumes in response to the current low price signals," Fonterra said. 

    Farmers facing up to the second consecutive season of poor returns will be looking to what Fonterra announces, presumably late on Friday, after its board meeting. Already the dairy co-operative has said it will axe 523 jobs, intended to save it about $55-$60 million a year. But farmers looking at a $4.40 per kilogram of milk solids price for the recently finished season (down from as much as $8.40 a year earlier) and now facing around $4 or possibly slightly worse for the current season will want to know what Fonterra can do for them right now.

    As a very large organisation that is on the one hand directly answerable to its farmer shareholders, but on the other is (albeit less directly) answerable to the New Zealand public for its management of a very significant part of our economy, Fonterra needs to make sure it is communicating clearly and openly at times such as this. The juggling act between the interests of its shareholders and those of the wider public is a tough one, but one Fonterra needs to get right. 

    In terms of 'openness' of communication, well, this writer is not too impressed with the efforts of Fonterra so far this year. Here's hoping Friday's statement is a wide-ranging and comprehensive one.

  • ANZ economists see farmers getting prices 5%-8% less for their milk in future than they have on average in the past

    Economists with the country's largest dairy farm lender are now predicting that farmers will get prices for their milk that are 5%-8% lower on an ongoing basis than they have been in the past.

    In their weekly Market Focus ANZ's economists say the current bout of weakness in global dairy prices appears to reflect some "structural shifts" in the marketplace that will have implications over the medium term.

    "That combination is enough to lower our expectation of where the milk price will sit on average over the cycle by 25-50 cents (from the nine-year average of $6.35/kg MS)," the economists say.

    "Generally the equilibrium price for wholemilk powder has been considered to be around the mid-US$3,000/t mark and has averaged US$3,400/t over the last nine years.

    "We now expect a range of US$2,800-3,400/t (mid-point $3,100/t) in the medium term due to these structural forces (though volatility is expected to continue to see prices cycle outside this range). This is 10-15% lower than previously assumed."

    The economists say they expect a falling New Zealand dollar to "provide a partial counterbalance at the farm gate".

    "The NZD is expected to trade at a lower level on average over the coming years; fair value has dropped by 4-6 cents. This provides something of a buffer, such that weaker international dairy prices will not flow through one-for-one to the farm-gate. Rather, some of the hit is taken by consumers of imported goods," they say.

    "So we are left with a 5-8% fall in dairy incomes and remember that’s not just a one off; it’s expected to be sustained. Put that through a discounting cash-flow model and it’s enough to see rural farm values retrace modestly. Of course cyclical dynamics (i.e. current price weakness) means the correction in farm values in the near-term will likely be a lot larger than that."

    Quotable Value offshoot Rural Value has indicated that there's been a big shift in sentiment following the recent sharp falls in dairy prices and there's now an expectation that there will be a drop in farm prices.

    The ANZ economists say the "major structural shifts" that they are seeing include:

    •  Increased European competition;
    • A period of rapid New Zealand production;
    • A more subdued medium-term demand backdrop (China, Russia and oil-dependent countries); and
    • Downward pressure on the global cost of production from lower energy, feed and fertiliser costs, the cost of capital lending to more large scale developments and a higher US dollar.

    "A lot of these facets contain political elements with supply being supported via self-sufficiency drives or playing to self-interest groups," the economists say.

    "The economics is simple; prices sit below the marginal cost of production so supply should be curtailed. This conventional economic (reality) channel is being curtailed by politics as regions choose to implicitly subsidise production in one shape or another such that markets forces are not coming to the fore. The TPP is a real time example!"

    The ANZ economists say a lot a lot is going to depend on "whether and to what extent farmers can put the scalpel to costs".

    "There are some wide-ranging estimates floating around. The likes of Dairy NZ are targeting removing up to $1 per kg milk solid in operating costs. That’s extremely tough, but the current position of dairy prices requires ambitious numbers. But we are more interested in the medium-term story. If dairy incomes are going to be 25-50 cents per kg of milk solid lower on average over coming years, then the cost side needs to exhibit the same – and this can’t be achieved by cutting core expenditure that generates long-term efficiency and productivity, such as fertiliser, pasture renewal and animal health. Cuts in those areas this season seem inevitable – with the inevitable impact on production – but they are not sustainable. It’s not going to be an easy equation to balance."

  • QV arm Rural Value has seen 'definite change in sentiment' after the latest sharp drop in global dairy prices

    The latest sharp drop in global dairy prices has led to growing expectations that there will be a drop in farm prices, according to Rural Value, a division of Quotable Value.

    QV's Rural Value National Manager, David Paterson said there was "a reasonable expectation" that the drop in dairy farm incomes would lead to a reduction in the sale price of dairy farms.

    “We are noticing a definite change in sentiment following the latest Fonterra GDT auction and over the past few months we’ve witnessed a significant decline in the number of farm sales recorded."

    Paterson said prior to the last two or three GDT auctions the market had been operating on the basis that the current commodity prices are a short term aberration and that the market would pick up through the season.

    “However the latest auction, which resulted in yet another reduction, has prompted serious doubt in the market.”

    He said the projected pay-out was now below the cost of production for most operators and there was now "anecdotal evidence of pressure on some farmers to sell before their financial situation deteriorates further".

    “Purchasers are also holding off on making investment decisions until there is a clearer picture of what is happening in the global dairy market and are waiting for distressed sales to occur to see what happens in the rural property market as a result.”

    Paterson said Rural Value had a number of highly skilled and qualified rural valuers working in the dairying areas of the country including Waikato, Manuwatu, Wairarapa, Whanganui, Hawkes Bay, Canterbury, Westland and Otago/Southland.

    "Their insights show the impact of the decreasing dairy prices on the rural land market has so far been varied in different parts of the country."

    Here is a breakdown of the views of the valuers around the country:

    Waikato Region

    Rural Value Waikato Registered Valuer, Chris Coakley, said, “In the greater Waikato districts we have seen continued sales activity and strong value growth in dairy and dairy support properties until very recently.”

    “During the last 12 months this growth has occurred in an accelerated manner relative to preceding years despite the lower commodity price and farms have been selling at higher values than they were a year ago particularly smaller units and those adjoining owner farm enlargements.”

    “However, since the latest drop in the milk solids price we’ve already seen an impact at an auction of an above average dairy farm, with good scale in the upper Waikato where at least one purchaser with pre-approved finance to purchase the property was asked by their financier to halt any purchase until their lending position had been re-evaluated.”

    “We do not have the data to yet say it has turned, but anecdotally we think this may be the beginning of sale prices softening and will keep an eye on upcoming auctions to see what impact this is having on values as more sales occur.”

    Central North Island

    The general sentiment of the wider rural market in the central North Island has been positive but the recent dairy auction results have now dampened this optimism amongst the dairy market somewhat.

    In the Manuwatu and Whanganui it has been a similar story to date, with good interest shown in properties offered to the market and in most cases good sale prices were still being achieved up until recently.

    Rural Value Palmerston North Registered Valuer Simon Willocks said “Dairy sales that occurred in the early part of 2015, demonstrated a continued confidence in the industry but the more recent GDT dairy auction results, may well have broken this level of optimism.”

    Recorded dairy farm sales ranged from $40,000- $50,000 per hectare for better units compared $25,000-$35,000 per hectare for lesser types.

    Rural Value Napier Registered Valuer Bevan Pickett said “the general sentiment of the wider rural market in 2015 in Hawke’s Bay has been positive. There has been good interest shown in properties offered to the market and in most cases good sale prices achieved.”

    “The dairying portion of Hawke’s Bay rural profile is relatively small and confined largely to the southern and western portions of the district. For these farmers the impact is real and there will be some clear effect on the region.”

    Rural Value Taranaki Valuer, Tony Welch said “Taranaki experienced a good level of activity and increased dairy farm value levels in the latter part of 2014 and early 2015 with the best farms selling at over $70,000 per hectare.

    “However, there has been limited activity since the end of May as product auction prices have declined and it’s expected that the real effect of lower product prices will be known next spring when the new season sales begin,” he said.

    “Good beef prices have stimulated some activity in that sector. There is also a steady demand for good quality Manuka blocks for honey production.”


    Ian Bunt the Principal Consultant for Rural Value in Canterbury said, “There have been fewer dairy farm sales in the Canterbury region during the first half of 2015 compared to strong sales and sustained value growth in 2014.”

    “Properties in the region tend to be significantly larger than those in the North Island and sale prices (land and buildings) ranged between $45,000 and $55,000 per hectare generally speaking through 2014-early 2015.”

    “The current market level is in all likelihood below levels set in 2014/early 2015, and while buyers and sellers have been reasonably upbeat, in the last few weeks sentiment has changed.”

    “In the market place there are rumours of purchasers now attempting to back away from agreements signed at 2014/early 2015 accepted levels.”

    “Potential buyers in the market are now opting to sit and wait for several months or at least (as they see it) until the first distressed sales occur before committing to a purchase.”

    “There were some good sales from March to June but that now appears to count for nothing and valuers are well aware the farm market relies on few sales to change it quite rapidly.”

    Otago/Southland Region

    There has also been a decline in activity with a fewer number of sales over the first six months of 2015 than during 2014 however so far there has been no significant decline in sale prices.

    Rural Value National Manager David Paterson said, “The market is very quiet at present and it’s likely that values will be lower but there is currently no real evidence due to lack of recent sales data.”

    “There seems to be limited interest from buyers with a recent dairy unit attracting no bids at auction however good farms in Southland still selling at between $42,000 to $48,000 per hectare while second and third tier properties are becoming harder to sell.”

    “Banks are working closely with farmers to help with revised budgeting forecasts, as extending credit in instances where debt/equity levels are already under pressure is not seen a viable solution long term. They are also asking farmers to minimise seasonal spending where possible.”

    “Spring will be the telling time for a lot of dairy farmers but so far there is only one report of a forced sale in Southland.”

    “Over the last several years the dairy farm market has greatly influenced sales prices and values in the arable, finishing, and to a lesser extent, the grazing market.”

    “However, generally these types of farms are continuing to sell well and we may now see the two markets become more disassociated as the net profit per hectare / per production gap closes.” 

    QV is New Zealand's largest valuation and property services company which offers independent and extensive services across the residential, rural, government and commercial sectors in New Zealand and Australia.

  • Farmer attitudes the key to earning top returns according to conference research. Industry in surprisingly good heart, reports Allan Barber

    By Allan Barber*

    An excellent programme at the Red Meat Sector Conference which took place in Nelson on Monday entertained and informed the large industry gathering, but there were also a couple of sideshows that added a frisson of interest and anticipation.

    For the second time the ginger group Meat Industry Excellence timed its annual meeting to coincide with the conference, although this year’s was held on the other side of the Cook Strait.

    However there were two MIE demonstrators outside the Rutherford Hotel on Monday morning clutching an elephant that they wanted to install in the conference room as a reminder to the delegates, as though they were likely to forget, MIE still has unfinished business.

    Alliance Group’s chairman and CEO were due to meet MIE representatives in Wellington on Tuesday to discuss the conclusions from the report Pathways to Long-term Sustainability and whether Alliance had changed its view of the potential benefit of a merger with Silver Fern Farms.

    My understanding is nothing has changed here for three reasons: firstly there is serious doubt about the accuracy of the processing and procurement savings in the report, secondly history shows mergers inevitably lead to market share loss and thirdly Alliance has six strategy areas it is working on to improve performance for suppliers and return on capital employed in the business.

    The other eagerly anticipated event has so far failed to materialise, but SFF’s announcement about its capital restructuring options is expected fairly soon. As one senior industry figure suggested to me, it would have been a friendly gesture for the company to have put us all out of our state of nervous anticipation at the welcome cocktail party on Sunday evening. Not surprisingly I assume the shareholders will be the first to hear this news.

    Considering the noise about declining sheep numbers and low returns, the industry is in remarkably good heart, although doubtless there are those who will say this is typical behaviour, burying heads in the sand as usual. The beef price this year has put a smile on sheep and beef farmers’ faces, although not on those only farming sheep, while predominantly beef companies can also look forward to a good year.

    At the conference there was much optimism about the potential demand for high value animal protein of the kind produced and processed by our red meat sector. But also several warnings about the importance and cost of getting further up the value chain.

    David Hughes, Professor of Food Marketing at Imperial College London, took the conference delegates on a photographic journey of global food trends, showing how the first world had changed dramatically from meals based around protein to meal solutions which were ‘snackable’, convenient, tasty, premium quality, natural and with traceable provenance. Also these meal solutions may well not contain beef or lamb.

    He argued today’s consumer was attracted by adjectives, such as local, free range, organic, grass fed, free from additives, whereas New Zealand was more comfortable with nouns. Today’s sophisticated consumer is looking for adjectives that describe the products’ benefits, not additives.

    Hughes also emphasised the importance of heritage and integrity, saying this country’s ‘heritage is golden, so don’t bugger it up!’ Traceability is crucial.

    Two sections of the conference served to underline a key fact we already know and which never seems to change – the top performing farmers succeed in posting significantly higher profits than those in the middle and lower categories.

    John and Catharine Ford, winners of this year’s Ballance Farm Environment Awards, explained how they follow both sustainable and profitable farming practices. Their commitment to sustainability is clear from the Award, but what is remarkable is the level of profitability which, in John’s words, resulted in a tax bill that is larger than some farmers’ net profit.

    As further evidence Marc Elliot from UMR Research described the results of his research into top performing farmers compared with a control group of middle performers. The top five farmers produced a return on assets of 8.6% and the top 30 ROA of 6.5% which compared with those at the bottom of the pile with ROA of less than 1%.

    According to his research there are six factors which distinguish the top performers from the rest: commitment to family and the way of life, passion for performance, focus on profitability, view of farming as a dynamic challenge, passion for people and the industry, and confidence in the industry.

    This graphically illustrates the importance of taking your future into your own hands and the futility of blaming the industry structure for an inability to make a decent profit. It is above all a matter of attitude and commitment to execution that will guarantee success. It appears that only the top farmers really know how to execute.

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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 ».

  • Heartland Bank sees annual profit up one-third, but next year's profit growth slowing to no more than 15%

    Heartland New Zealand, parent of Heartland Bank, says its June-year profit will be up a third and next year's profit will rise between 6% and 15%. Heartland also says dairy loans comprise 7.6% of its total lending and it's working with clients under financial stress to fund working capital shortfalls.

    Heartland says its June year financial results will be released on August 18.

    "Heartland advises that it expects its net profit after tax (NPAT) for the year ended 30 June 2015 to be approximately $48 million which, as previously advised, is at the upper end of the NPAT (guidance) range of $46 million to $48 million," Heartland said in a statement.

    It added, however, that this result is preliminary and subject to finalisation.

    Heartland also said its preliminary forecast range for June 2016 financial year NPAT is $51 million to $55 million, including an allowance for estimated impairments.

    Last year Heartland posted NPAT of $36 million, meaning this year's profit is set to be 33% increase. Next year's forecast, meanwhile, suggests a slower increase of between $3 million and $7 million, or 6% to 15%.

    Heartland also said that, given heightened interest in the dairy sector, its exposure to dairy is currently 7.6% of its total lending book. As of March 31 Heartland had total finance receivables of $2.225 billion. That puts Heartland's dairy loans at about $169 million. The bank will, however, also have exposure to industries serving the dairy sector.

    "The average loan to value ratio (LVR) for Heartland’s dairy exposures is 61%. However, it is important to note that LVRs are only one of the indicators of loan quality," Heartland said.

    "Where Heartland’s dairy clients are experiencing financial stress as a result of lower dairy pay-out forecasts, we are actively working with them to fund working capital shortfalls where appropriate and ensuring they have access to appropriate support including emotional support through the Rural Support Trust and Farmstrong."

    Heartland's shares were up more than 4% to $1.19. 

    Formed in early 2011 through the merger of Marac Finance, CBS Canterbury and the Southern Cross Building Society, Heartland targets niche markets featuring small and medium sized businesses, the rural sector and the retail and consumer sectors. Heartland bought the good loans of rural lender PGG Wrightson Finance in August 2011. The Reserve Bank granted Heartland bank registration in December 2012.

    Heartland also completed the $87 million acquisition of reverse equity mortgage businesses Sentinel and Australian Seniors Finance from Seniors Money International on April 1 last year. And last September Heartland bought a 10% shareholding in New Zealand's first licensed peer-to-peer lender Harmoney, and is lending money through Harmoney's online platform.

  • The Weekly Dairy Report: Calving starts as dairy support farmers also feel the downturn

    With most of the country suffering a month of cold temperatures and above average soil moisture levels, managers are looking for an early spring to kick start growth.

    Northern herds are well through calving and are looking for soil temperature to lift so N applications can boost early spring grass, while lower North Island herds are just starting their new season.

    Reports suggest more surplus dairy beef calves will be reared, as managers look for any extra income to supplement the predicted unsustainable payout and some owners have gone back milking, to reduce costs further.

    DairyNZ has launched a campaign to help farmers grow and utilise more pasture in a drive to return farmers to the low cost pasture driven producers that gave them a global advantage in the past.

    The market news continues to worsen, as Open Country Cheese slashed its forecast to $3.65-$3.95, and fortnightly Oceania milk powder pricing drops to yearly lows.

    All bank analysts have also reduced their estimates, although a wide variation of $1.20/kg reflects differing levels of confidence among these institutions.

    Big revaluations downward are being made on all milk processors stocks, and with the big currency drops, hedging positions will also be influential in determining the level of payout predictions.

    Dairy giant Danone has warned the rebound will not start until next year probably too late to change the present predictions, as the global market must first consume some large stocks carried.

    The downturn has seen the Reserve Bank cut interest rates and with more predicted to follow, some relief will be felt from the cost of debt, but concerns build at the length of this low price period, and the vulnerability of those heavily leveraged operators.

    Graziers and suppliers of next years winter cow grazing will soon be making tough decisions of how much feed to put in for a sector certain to want off farm feed costs at a reduced rate.

  • Finance Minister agrees $2.40/kg payout would be "disastrous"; says RBNZ and Govt in talks with banks to 'go easy' on farmers

    By Bernard Hickey

    Finance Minister Bill English has admitted the Government and Reserve Bank are in discussions with banks to ensure they don't prematurely force dairy farmers into mortgagee sales that could trigger a dangerous spiral lower in land values.

    English's comments came after a report that a bank was forcing dairy farms into the arms of receivers in South Canterbury, although the report did not give details of the bank or the farms involved.

    He told reporters in Parliament the longer term view was that consumer demand in China for dairy products was strong despite the recent stock market slump, "but in the short term it might be a bit softer."

    He agreed a payout of as low as NZ$2.40/kg, which was one scenario suggested last week by BNZ, would be disastrous.

    English was then asked if the Government was talking to banks to 'go easy' on indebted dairy farmers.

    "It's a topic that we've been discussing and the Reserve Bank is certainly discussing it because of their interest in financial stability," English said.

    "So they'll be looking with the banks fairly closely into just where the dairy debt lies. And it's a relatively small number of dairy farms that have high levels of debt. So the indications are the banks are certainly going to be helping fund a lot of farmers through this next season because their cost of production could be higher than their revenue," he said.

    "And then there will be a minority for whom there is some real pressure, because they were over-extended on debt."

    English said banks had been careful in the last downturn in 2008 and 2009 "because they understand that if they push too hard they could create a broader problem by pushing land prices down if they try to sell too many farms."

    "All the indications are they understand the scale of the problem and they are going to be pretty considered in how they deal with it," he said.

    Key confident of long term for dairy

    Prime Minister John Key was more upbeat on the outlook for dairy.

    He said Fonterra's expectation was that dairy prices may come down "a little bit more."

    "But overall I still stand by the way that you will continue to see exchange rate adjustments if that's the case, but the long-term outlook's pretty strong," he said.

    "At the highs and lows it always seems pretty extreme - the question is what do the long-term fundamentals look like and generally they still look pretty good for dairy.

  • Andrew Little says Labour opposes TPP unless it allows future Governments to ban foreign buyers of land and houses

    By Bernard Hickey

    The Labour Opposition has opened a new front in its drive to ban foreign buyers of land and houses, saying it would oppose the Trans Pacific Partnership Agreement (TPP) unless it allowed future Governments to ban such sales.

    Labour Leader Andrew Little detailed Labour's tougher policy on the TPP on Tuesday after Prime Minister John Key said the TPP would effectively stop any future Government from banning non-residents from buying New Zealand land and houses.

    Key has said New Zealand's 2008 Free Trade Agreement (FTA) with China included a Most Favoured Nation clause which meant China was entitled to the same treatment as other nations in any future free trade deal. New Zealand's FTA with Korea, which has been signed and is being finalised, prohibits any ban on foreign buying, meaning China has to be treated the same. Key has also said the TPP, which is in the final stages of negotiation in Hawaii this week, would also prevent any ban.

    Little said the Government was being disloyal by refusing to protect New Zealand's sovereignty and was betraying the nation's long-term interest by locking future Governments into such a deal.

    "The Government must have the right to restrict the role of non-resident foreigners when it comes to our property market, whether it's residential or farm land. We must have the right to set our own rules to act in our interest." Little told reporters.

    "We don't know what's in the TPP. The whole thing is secret which is why Labour has put some bottom lines there, including protecting the right of future governments to legislate in the best interests of New Zealand, including putting restrictions or bans on what non-resident foreigners can do in terms of land sales," he said.

    Labour's other 'bottom lines' included the protection of Pharmac, stopping foreign corporates from successfully suing the Government and ensuring meaningful gains in market access were achieved.

    "We cannot have the situation where the Government is at risk of legal action because of its attempts to legislate in the best interests of New Zealanders," he said.

    "If it compromises or prevents the ability of any future government to restrict land sales, residential or farm, we will be opposed to the TPP."

    However, Little would not commit to repealing or changing the TPP if Labour was the Government, saying only it would have to make it's decision at the time, given it did not know what was in the TPP.

    "I don't know what the scope would be for a future government to do with a concluded agreement," he said, adding however the full agreement will not be voted on in Parliament. There may be enabling legislation that will have to be voted on.

    "We will oppose the TPP in whatever form we can if it prevents a future Government from acting in the best interests of New Zealanders," he said.

    Little said the primary concern about the TPP it had received in feedback from voters was the risk or threat of preventing a future Government from restricting land sales.

    "That's what they fear most. The Government should hear that message. That's why we've taken the stance we have," he said.

    He said the Government should renegotiate its bilateral deal with Korea if it prevented a ban on foreign buyers.

    Key admits Pharmac costs may rise

    Meanwhile, Key told reporters the TPP could extend the patents on medications, preventing Pharmac from quickly using generic versions, but that these costs would be more than offset by gains through increased market access.

    "Patents will run for a little bit longer and that means the government will have to pay for the original drug as opposed to the generic for a little bit longer," Key said.

    "For consumers that won't make any difference because for subsidised drugs you pay $5 for your prescription. So the government may incur slightly more costs there but then the government has to say what are the benefits that we get? Of course, if we have a lot more exports and a lot more economic activity we gain a lot more revenue there," he said.

    "There's always a bit of give and take, but overall it's at the margins and the modelling  we've seen presents more benefits than costs to us."

    Doctors have estimated the TPP could increase drug costs by NZ$25 million to NZ$50 million a year.

    Little said the Government appeared to be going back on its commitment to retaining the benefits of Pharmac.

    "A couple of months ago they were saying they were going to protect the Pharmac model and they're going back on that undertaking. That's the whole problem with a negotiation done in secret," Little said.

    "If they now want to load up more cost on the New Zealand taxpayer to meet the cost of Pharmac, that's not acceptable."

    Little denied Labour had reversed its earlier commitments to free trade.

    "We remain absolutely committed to free trade. We're a small trading nation and market access remains absolutely vital, but the TPP does more than market access. We don't even know what market access it's going to achieve, but it does way more than market access and that's the problem with it," he said.

    "We listen to all New Zealanders and we listen to a lot of New Zealanders who are concerned about the potential threat to the future sovereignty of New Zealand Governments."

  • The Sheep Deer and Cattle Report: Wet winter tightens feed supplies for early lambs in the North Island


    More small chilled lamb schedule price lifts this week, but little change to the gloomy Chinese and UK markets for NZ product, although one processor has suggested lower numbers will increase demand for Christmas orders, and the recent currency's fall against the pound, the euro, and US dollar have been helpful.

    Economic conditions in China with it's shaky sharemarket, and in Europe with fears the Greek situation could spread to other countries, coupled with good domestic production in the UK and China, are major handbrakes to a rapid turn around of confidence for the lamb export sector.

    Lambs are arriving in lower altitude farms of the North Island onto wet soils and low pasture covers, as managers look for an early spring to kick start growth, and grow animals to be ready for harvest before the predicted dry El Nino conditions kick in.

    In areas that were not affected by the dry, scannng percentages have been above average, and fears build that lack of feed at lambing could affect survival rates.

    Sheep farmers have successfully supplemented their incomes in the past few years with dairy support and the downturn in that sector will hurt profits and could push beef store stock demand higher than it should be.

    Silver Fern Farms Alpine merino hogget contract has been priced at $6/kg to continue this creative marketing campaign and reaffirm the importance of this income option for high country farmers.

    More signs this week that Silver Fern Farms are close to confirming their capital raising initiatives as they suspend trading on its shares and also announce they are selling their share in a rendering plant in the South Island.

    Both co-op shareholders have achieved the numbers for a special general meeting to discuss merger proposals, but directors remind reformists this will be no directive for change.

    In-lamb ewes are appearing at saleyards but most are only making about $100/hd, as most sheep farmers take a conservative view on future prospects, although at Temuka in a small yarding of 3000, many good ewes with high scanning percentages sold at $140-$150 a head.


    A small North Island auction for mainly early shorn and second shear wools was fully firm on recent values, helped by the lower currency, but low volumes masked the present weak demand out of China and Europe.

    Early mid micron indicators show prices that are well ahead of last years levels and it is hoped that these levels will flow over to merino's finer fibres which last year returned disappointing returns.


    More big beef price rises as global shortages drive demand, and store and prime animals in saleyards have now breached the $3/kg lwt barrier, as farmers with feed chase animals with early finishing potential.

    Reports from the US reveal their dairy farmers are also rearing their surplus calves for dairy beef, which will eat into a market NZ producers once claimed as their own.

    With such a long lead time to finishing for young animals caution is being urged on prices paid, as early signs are already being seen by consumers who are resistant to the very high prices for the product.


    Some small venison schedule lifts this week as positive demand and a more favourable currency, starts the chilled harvest season.

    Industry leaders report they are looking to add further value to the lower priced cuts as the higher end premium is close to an optimum in competition with other proteins.

    Early August sees the casting of buttons by stags and heralds the start of the new velvet growing season, and growers will be hoping for more of the same for this specialist activity that has recently yielded some of the best per hectare returns of any livestock operation.


  • Will the better results improve the likelihood the two big meat co-ops can finally find a way to merge, asks Allan Barber

    By Allan Barber*

    A note to shareholders last week updated the company’s position after 9 months and predicted a substantial improvement on last year.

    Gains have occurred across the board with sales up 8.6% or $150 million, debt $100 million lower and improved inventory turnover.

    This enables Silver Fern Farms to forecast EBITDA of between $75-80 million for the year ending 30th September. This is quite a bit better than last year’s $39.3 million EBIT which was $68 million on a comparable basis, although there should be even more improvement at the NPAT level because of reduced interest costs and the need to provide for redundancy costs in 2014.

    After allowing for depreciation EBIT should be around $45-50 million with a further $30 million of finance costs which would produce a net profit before tax of $15-20 million.

    This would be significantly better than results in recent years and may be good enough to provide a return of 5% on net assets. Last year’s after tax profit was less than $500,000 which admittedly was a big improvement on the $28.6 million loss in 2013.

    On the face of it the country’s biggest meat processor is in a much better state than at any time in the last five years in spite of the declining sheep numbers leading to fewer lambs for slaughter. It appears the operational decisions to close inefficient capacity and rebuild Te Aroha, as well as shedding ownership of co-product facilities, have all started to pay off.

    The big question is whether this level of performance improvement is sustainable in the future against a backdrop of falling sheep numbers, fewer prime cattle and rising cull cow numbers, with prospects boosted by a lower New Zealand dollar. Market conditions are uncertain, particularly in Europe and China, although the outlook for beef is positive.

    Shareholders of both SFF and Alliance are unhappy about the failure to give serious consideration to a merger as a means of reducing costs and improving farmers’ returns and are unlikely to view one good year for their meat processor as an indication of future farm profitability.

    Each cooperative will now be required to hold a special general meeting to vote on a resolution which, if passed, seeks to require the directors to provide an analysis of the potential benefits and risks of a merger as well as an independently verified risk mitigation plan. However Alliance chairman Murray Taggart makes the point such a resolution would not be binding on the directors.

    In the past both cooperatives have considered the benefits of a merger, although Alliance has steadfastly maintained the weakness of SFF’s balance sheet makes such a proposal uninteresting. It will be interesting to see whether SFF’s performance improvement provides sufficient justification for reconsideration, although Taggart says in a press release Alliance is working on six key priorities for improving returns to its shareholders.

    He also maintains the benefits of a merger estimated by consultants GHD and published in MIE’s report Pathways to Long-term Sustainability are unrealistic. It is becoming increasingly possible the combination of livestock population and SFF’s improved balance sheet may offer enough benefits for a merger to be an attractive option. The results of SFF’s capital raising exercise will be announced in August which will provide another important element for both company and its shareholders to take into account.

    There is still a fair amount of water to flow under the bridge before we will see a clear picture of the future shape of the meat industry, but it is encouraging to see better performance after several years of pain. Farmers will be hoping this bodes well for their on-farm profitability as well.

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

  • BERL Chief Economist Ganesh Nana says RBNZ should allow OCR to fall towards 1.5% given weakness of inflationary pressures and demand in economy; sees NZ$ falling to high US50c mark

    BERL Chief Economist Ganesh Nana

    By Bernard Hickey

    Wellington-based independent economic consultancy BERL has forecast a slowing of economic growth and has suggested the Reserve Bank should allow the Official Cash Rate (OCR) to fall towards 1.5%, given the lack of inflationary and demand pressure in the economy.

    BERL Chief Economist Ganesh Nana told a briefing in Wellington that BERL's formal forecast was for an OCR falling to 2% by the middle of next year, but that the Reserve Bank should be cutting it towards 1.5% if it was purely looking at the inflationary signals in the economy.

    "There just isn't the inflation out there and the tradable sector and core retail have been in deflation for the last three years," Nana said.

    "The inflation target is meant to be on average over the medium term. They've got enough headroom to allow inflation to pick up," he said.

    Asked if the sharp fall in the New Zealand dollar in the last year would drive inflation up, he said: "The state of the demand side shouldn't allow inflation pressures to flow through as much as they have in previous cycles."

    Nana said he agreed with the Reserve Bank's view expressed last week that a more substantial exchange rate depreciation was required.

    He said another 10% fall in the currency was needed towards the high US50c to low US60c mark, and towards the low to mid 80 Australian cent mark. BERL forecast the TWI would fall to 62 from just over 70 currently.

    Nana described the current slowing of economic growth as a cyclical downturn rather than something more substantial, largely because of the fall in the New Zealand dollar and lower interest rates was helping to cushion the blow from falling dairy prices, and boosting growth from other export sectors such as meat, wine and tourism.

    He said one risk to the outlook for only a moderate downturn was if the Reserve Bank "gets cold feet and sees the ghost of inflation."

    The New Zealand economy had experienced relatively strong growth in recent years because of a coincidence of supportive factors, including the Christchurch rebuild, the surge in dairy prices in 2013/14 and solid consumer spending, along with high net migration, he said.

    "Those factors have come off the boil," he said, adding there was a risk that inexperienced observers over-reacted to the fall in the exchange rate.

    "We need that adjustment in the exchange rate to continue a bit further," he said.

    "The significant risk is that we talk ourselves into a downturn and we don't realise this is an ordinary slowing."

    Worryingly strong M3 growth

    Nana also showed a chart (see below) showing a divergence this year between growth of money supply in M3 terms and GDP growth, suggesting strong lending growth was being pumped into asset values, rather than real investment.

    This divergence was happening for the first time since the period before 2008 when double digit lending growth helped power double digit house price inflation, Nana said.

    "This shouldn't be happening," he said, adding it was relatively recent and too soon to make a definitive judgement.

    "We won't call it a bubble yet in terms of asset prices, but there's a departure between how fast the money supply is growing and how fast the economy is growing," he said.

    "When that departs in those two directions we get a little bit concerned it may be stoking up problems in terms of further unwarranted asset prices, or it may, horror of horrors, flow through into inflation."

    Auckland housing bubble?

    Later Nana said Auckland's housing market was in bubble territory, but there were no obvious factors currently present that would say it was about to burst.

    "Yes it's a bubble. What might burst it? I'm conscious that the New Zealand housing bubble didn't burst in 2008," he said, adding confidence levels and the approach of banks would be key factors to watch.

    "There's no inherent factor that would say it's got to burst," he said, adding that various supply and demand factors such as increased house-building and slowing migration "would take the froth off it rather than pop it," over the medium term.

    Jobs growth in tradeable sector?

    Elsewhere, Nana questioned where the jobs growth would come from as the economy adjusted to the lower exchange rate and exports increased, given employment in the tradable sectors had been largely flat over the last decade despite increasing export revenues.

    "We have a dichotomy in front of us. We are reliant on our tradeable sector to earn us dollars and foreign currency, but our tradeable sector does not give us jobs," he said.

    Jobs growth had instead come over the last decade from the non-tradeable sectors such as construction and domestic services such as health, education and financial services.

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