Rural

  • Higher European dairy production is bad news for New Zealand with no tapering off evident, and their cranking up of WMP production

    By Keith Woodford*

    The EU has now released dairy production statistics for February 2016 and from a New Zealand perspective the news is all bad. Daily milk production has increased 6.5% from January to February. Some increase was expected – February is always higher than January on a daily basis – but the extent of the increase is a surprise.

    The combined January and February production is up 7.4% from last year, and February production, once adjusted for the leap year, is up almost 10% on a daily basis from January last year.

    There are some glimmers of hope in other parts of the world, and I will come to that later in this article. First, more about Europe.

    Until now I had been hoping to see the EU production trajectory start to taper off relative to last year as from April, but that now looks less likely. It is now starting to look as if it could be later in the year before this tapering occurs, with the price recovery being further delayed after that.

    Whereas some EU countries produce monthly data very quickly, Germany, France and some other countries take six weeks to get the numbers out. And without Germany and France in the mix, with these being the largest dairy producers in Europe, it is hard to determine the overall pattern. Hopefully by mid-June we will get a better feel as to where the current Northern European season is going.

    The production increases for January and February are driven by the ‘usual suspects’. Compared to the previous year, Ireland is up a massive 33%, Netherlands is up 16.5%, Germany is up 6.1% and Poland is up 8.6%.  This is after adjustment for the leap year. Otherwise increases would be even greater.

    Even worse from a New Zealand perspective, is that Europe is cranking up its production of whole milk powder (WMP) after holding back throughout 2015. Production in January is up 22% from the same months last year.

    The reason for the increasing WMP is not because it is profitable, but rather because producing WMP is what companies do when they have no other outlet.

    Production of skim milk powder (SMP) is also increasing, up 15% for January and February compared to the same months last year. SMP prices are awful, but the Europeans keep producing it because it is a by-product of butter, which remains one of the more profitable products.

    Farm gate prices in Europe are drifting lower but are still about 40% above New Zealand levels. These European prices will keep coming down. However, spot prices for milk in some countries, such as the Netherlands, are only 0.17 euros per litre which is right down to NZ farmer payments.  

    The road ahead for Irish farmers could also be very rocky. They have a similar product mix to New Zealand, based off seasonal production, but with somewhat more value-add that New Zealand, They already receive considerably less than most EU farmers for their milk because of their powder-based seasonally-produced product mix.

    Source: EU Milk Observatory 

    It is only when looking beyond the EU that New Zealand farmers will see some glimmer of hope. Chinese global imports of WMP – not just from New Zealand – are up 22%.in the first two months of this year. SMP is also up by 25%. I am waiting eagerly to see March statistics which will give us a better indication going forward.

    In a perverse way, the bad news coming out of Murray Goulburn in recent days will provide some relief for Fonterra’s Australian operations, and this will flow through to the Fonterra’s profits in New Zealand

    Murray Goulburn is the farm gate price setter in Australia, just as Fonterra is in New Zealand. Murray Goulburn has had apparent success in rebranding itself as a value-add dairy company, but it seems the rhetoric eventually got in front of the reality. Both the CEO and the CFO have had to fall on their swords this week for being grossly over-optimistic in their forecasts, and now far too slow to revise them.

    The latest news out of Murray Goulburn is that their market returns will now only support farmer prices of $A4.75 to $A5 per kg milksolids. Even before adding the exchange rate adjustment of about 10%, this is still a long way above what New Zealand farmers, apart from those supplying Tatua, will get this year. But Australian farmers had been told to expect at least $A5.60, or more than $NZ6 per kg milksolids, and there was no warning that the projection might be at risk.

    Some months back, Fonterra’s Theo Spiering was strident in his criticism of Murray Goulburn, saying their farm gate price predictions were far too high. Well, on this one, history is showing he was indeed correct.  

    Murray Goulburn’s pain will now allow Fonterra to offer its own Australian farmers considerably less than otherwise. It won’t have a great effect in the current year which is drawing to a close, but on a 12 month basis it has the potential to raise net cash flows from Fonterra’s Australian operations by more than $NZ100 million.  Of course this will flow to Fonterra’s profits and dividends, not to the milk price. So farm owners and unit shareholders will benefit but not sharemilkers.

    Here in New Zealand, the January to March production has held right up to previous years, despite some media reports to the contrary. Yes, Fonterra is down, but the rest of the industry is overall up. For most, it has been a marvelous summer and autumn, with plenty of sun and just enough rain.

    Overall New Zealand production for the total season is now down only 1.7% – a much smaller drop than many reports relying on Fonterra data have been indicating. But next season, unless we get another year of bountiful weather, and with reducing cow numbers from the current seasonal cull, overall production is likely to be down something more than 6%.


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

  • In a world increasingly sceptical about trade agreements and more focused on short term patch-protection, it will be our food safety systems that will keep access open for our food exports

    Persistence pays off

    By Allan Barber*

    Before he left for China last week, New Zealand’s Special Agricultural Trade Envoy, Mike Petersen, gave me his thoughts on the process of trade negotiation and a brief list of successes he has been involved with since 2003. At that time he was Chairman of Meat & Wool NZ as it was called in those days.

    During that 13 year period New Zealand has signed free trade deals with Taiwan, China, ASEAN which comprises 12 countries and at long last South Korea, not to forget the TPPA. No wonder he called trade negotiations ‘like water dripping on a stone.’ Signing FTAs is never quick and demands a huge amount of manpower, preparation, patience and recognition no country ever gets everything it wants.

    The reaction to the TPPA, not only here, but also in other signatory countries, notably the USA, indicates a growing feeling of disaffection with free trade deals because of the perceived loss of sovereignty they entail, including domestic employment opportunities, and conversely the benefits to big business.

    In North America, Great Britain and Europe, there are big signs a significant proportion of the electorate is fed up with traditional politicians and politics as a whole. Politicians, particularly governments, are increasingly associated with, and seen as corrupted by, big business which epitomises the increasing gap between rich and poor. The Panama Papers leak has merely served to confirm the rich want to get richer by avoiding their legal tax obligations.

    There is also the migrant crisis into Europe out of the Middle East which is causing a vocal minority in countries like Germany, France and Britain to make a lot of noise and, in certain cases, undertake terrorist activities. This trend towards more rabid nationalism may result in the UK voting for Brexit from the EU in June. This would have huge implications for New Zealand’s future trade with the EU and Britain, as it may have a substantial detrimental effect on both British and European economies as well as their ability and desire to import from New Zealand.

    There also appears to be a strong nationalist and anti-politics trend in the USA both on the right and left, as demonstrated by support for Donald Trump, Ted Cruz and Bernie Sanders. The far right wants to erect walls to keep Mexicans out and ban Muslims, while left leaning Sanders is campaigning on breaking up the Wall Street banks. The one comforting aspect of this for the American establishment is none of them is likely to win the US presidential election in November, but there is no certainty TPPA will pass a Republican blockage in the Senate.

    Therefore while global trade has never been more open, the unpopularity of the governments that are intent on further trade liberalisation may start to run into serious headwinds from electorates determined to restrict such freedom. It is worth noting this trend is most evident in so-called democracies, rather than more authoritarian regimes like those in Russia, China, and the Middle East.

    While there would still be China to trade with, the implications are enormous for the stability of world trade if any of the doomsday scenarios were to occur. Just remember how much disruption to the global dairy trade has arisen from the Russian trade embargo, combined with the removal of the cap on EU dairy production.

    While there are other trade agreement opportunities for New Zealand with India and Central American countries, the biggest current agenda items are finalising TPPA, negotiating an FTA with the EU and upgrading the China FTA to match or exceed the provisions of Australia’s CHAFTA, completed last year.

    New Zealand can have little input into convincing the Senate to adopt TPPA and the negotiations with the EU will not be quick. But there is plenty of expectation around the Prime Minister’s trip to China. It is uncertain how soon the FTA will be renegotiated, but it seems the respective Trade Ministers will begin the process when they meet in Peru later this year. In spite of John Key’s good relationship with President Xi, there will also have to be a quid pro quo. But the latest piece of good news from the visit to China is about access for chilled meat at long last. Also largely unknown, China’s large minority Muslim population makes it New Zealand’s largest single customer for Halal certified exports and the news has just been announced of  China’s adoption of our Halal processing system as their template.

    Updating the terms of the FTA from when it was first signed in 2008 to increase dairy access and permit New Zealand chilled meat into China are two of the minimum expectations without which an upgraded FTA would be regarded as a failure. Our preferential access quota for dairy was sufficient for a mere 17 days of 2016 before the standard tariff kicked in; while Australia already has 10 meat plants licensed by Chinese authorities for chilled meat access.

    Those two items alone will have a multi million dollar effect on New Zealand’s dairy and meat sectors. However, as things stand, not all plants have been listed with the relevant Chinese agency and, to achieve equity between different export licensed plants this must be resolved as soon as possible.

    Petersen told me licensing issues will become increasingly tough when exporting to all our trading partners, regardless of FTAs, because countries wish to exert greater control over food assurance. New Zealand is fortunate to have negotiated food safety equivalence arrangements with our main trading partners, like the USA and EU, which then flow automatically through to those trading blocs’ other relationships.

    Gaining the confidence of other major markets like China in our food safety systems means New Zealand’s agricultural exports will gain in credibility. In a world in which free trade may be facing some degree of threat, this is a welcome point of difference to set us apart from the pack.


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

  • European dairy expert here telling us not to worry about rising EU milk output - "its finally starting to taper off" he says

    Content supplied by Rabobank

    Signs are emerging that EU milk production growth is finally slowing, indicating the recent post-quota surge in production is a “one-off adjustment rather than an opening of the floodgates”, according to a visiting expert on the European dairy sector.

    Rabobank Netherlands-based senior dairy associate Matt Johnson, who is in New Zealand delivering a series of industry presentations, said after exhibiting significant growth in the first year after liberalisation, EU milk production growth was “finally starting to taper off”.

    “The removal of milk quotas on April 1, 2015 signified the end of more than three decades of regulation in the European dairy industry,” he said. “While the subsequent surge in milk production across many EU member states was anticipated, the fact that this growth has been sustained – despite the slump in global dairy prices – has taken everyone by surprise.”

    Mr Johnson said there had “effectively been the perfect storm in global dairy markets, with the removal of quotas encouraging European dairy farmers to increase production to maintain their cash flows. And this just happened to coincide with weaker demand (particularly out of China) – which has prolonged the slump in global prices.”

    Presenting to dairy farmers at Rabobank client events in the Canterbury, Waikato, Taranaki, and Manawatu regions this week, Mr Johnson has been interpreting the latest trends in the EU dairy market for more than 10 years. With a key interest in the changing milk supply map across Europe, he is a close observer of how European farmers are adapting to the new marketplace post the removal of quotas.

    Mr Johnson said European producers had been buffered from some of the downturn in global dairy prices – at least initially – by the favourable Euro exchange rate and slightly lower feed costs. “However, the cost of production is now below break-even for many European producers, and we are starting to see this translate into an increased focus on cost-saving rather than expansion,” he said.

    Mr Johnson said while the ‘economics’ would invariably slow milk production growth, the slow-down would not be uniform across the EU, with production showing no signs of abating in Ireland and expected to remain strong in the Netherlands.

    “The Irish industry has been given a helping hand, with Irish dairy cooperatives supporting members throughout 2015 to the tune of around EUR 100 million,” he said.

    “Production also remains strong in the Netherlands, as uncertainty over environmental regulations has caused confusion, encouraging farmers to hold on to cows they would have normally slaughtered.”

    Meanwhile, production growth is set to remain muted in the two largest milk-producing countries, Germany and France, which only posted a respective 1.3 and 1.2 per cent increase in production since quotas were removed.

    Operating in an unregulated marketplace, EU producers would now be “more reactive to market signals”, Mr Johnson said. And he advised New Zealand producers to keep a close watch on their European counterparts.

    “Producers in New Zealand will need to keep an eye on what is happening in the EU, particularly Ireland and the Netherlands, as farmers in Europe will produce more if they are incentivised by markets to do so,” he said. “And we have not seen market signals dictate production in Europe before, like it does here in New Zealand.”

    Mr Johnson said the EU was increasingly targeting marketing opportunities in the Middle East and Sub-Saharan Africa, and would directly compete with New Zealand product in certain markets. “For example, we would expect to see more competition between European and New Zealand players in the skim milk market,” he said.

    Throughout 2016, Mr Johnson said, dairy consumption growth would remain relatively stable, but there would be renewed import demand out of China and South-East Asia.

    “As we see demand start to pick-up, and production growth slow in the EU, the global dairy market will slowly re-balance. This will see global dairy prices improve, but it will take most, it not all, of 2016 for the global market to return to equilibrium,” he said.

    Responsible for analysing the dairy sector for Rabobank in the EU, Mr Johnson previously spent 10 years at DairyCo – a UK levy organisation working on behalf of farmers.

  • The Weekly Dairy Report: Late El Nino lowers autumn growth as some dry off early

    With very little rain from Napier to Dunedin autumn pasture growth rates have plummeted with the only saving grace being the mild conditions.

    Last weekend’s rain was minimal and while dryland crops have withstood the lack of moisture well, they alone will make winter feeding difficult.

    Irrigated properties and those that have had rain look a picture, benefitting from the mild conditions and lack of wind.

    With a late El Nino occurring in many other dairy areas, early dry off decisions will need to be made to protect next seasons production, with light and low producing cows being dried off first.

    Another hard decision will be how much should be spent on preventative mastitis medications for cows at the end of milking, and dairy advisers suggest vet advice will be important as cutting costs here may have a significant effect on next years production.

    The negotiations between graziers and dairy managers continues with some rates mentioned not sustainable for those growing feed.

    More deals need to be made which will reward those reaching liveweight targets on time, body condition scores by calving, and low empty rates in new calving heifers.

    Feed volumes available are variable between districts and amount of irrigated crops grown, and some will need to add in the cost of cartage with the cheaper feed further away.

    Officials have now stated that the velvet leaf incursion will not be able to be eradicated in one season as some seed has been dispersed and will need to be controlled by chemicals in the future.

    Fonterra have announced a new auction system to complement the Global Dairy Trade event.

    This platform covers the vast array of dairy products, is open 24/7, and allows purchasers to buy smaller packages confidentially, in a global shop set up.

    The optimistic ASB followed the auction with a predicted forecast of near $5/kg ms for this year and $6 for next.

    Fonterra plans for their governance review to reduce the directors from 13 to 11 with the majority being farmers, has met with a muted response with change proponents.

    Yashili has launched their infant formula onto the NZ market to increase the competition for added value products in the domestic market.

     

  • The Sheep Deer and Cattle Report: Wool back to last years prices but hopes of Chinese chilled meat access is welcome news for sheep farmers

    LAMB

    Another week of stable but low schedules as the frozen product restricts any lift in prices at present, although good chilled Easter sales were recorded into the UK and lower domestic volumes in China suggest prices could soon be on the rise.

    A welcome boost for the red meat sector was the announcement that NZ has made progress on the chilled meat access to the Chinese market as a result of the recent PM’s visit to that country.

    With chilled lamb prices well ahead of frozen (60%+), the kill ahead of the norm, and total production back, the reports that this trade could start as early as in 2 month’s time, will be great news for winter finishers.

    The potential of the Silver Fern Farms, Shanghai Mayling deal could be seen quickly if OIO approval succeeds, and also with Alliances / Grand Farm relationship, NZ processors are well placed to capitalize on the chilled market trade.

    NZ has also gained halal certification for the Chinese market ahead of any other country and will lead the world in access to this specific market.

    Weather at mating has been dry from Napier to Dunedin and if this results in another year of lower production  further stress will be put on sheep farmers profits.

    Beef and Lamb NZ's Hill Country Symposium  agreed that this type of country was in steady decline and a plan was need to stem this trend and return this valuable NZ asset back to profitability.

    Silver Fern Farms has warned after reviewing half year returns, profits will be back from last years excellent result, after this years kill flows and poor frozen demand for sheep meats has lowered returns.

     

    WOOL
    The single South Island wool auction last week saw prices ease back to North Island levels and only 75% of the offering was sold.

    Fine crossbred and lambs wool are now at yearly lows, as the NZD rose to a 10 month high against the USD and sapped the remaining heat out of the wool market.

    It is worth noting that the second shear wool contract pricing is ahead of this sales values for these wools, and should give growers confidence that this alternative selling method can add value to their product.

    Limited demand for ultra fine merino wool resulted in a weak sale of stock from Mt Cooks Station's clearing sale of Saxon merinos, where the the breeding stock averaged just $40 a head.

     

    BEEF
    Prime beef schedules remained steady
    but bull schedules lifted again driven by one processor who has lifted their schedules by 40c/kg CWT in the last two weeks.

    Plants continue to run at capacity with cull dairy cows dominating the kill, and more interest starting to emerge from the US for manufacturing cuts.

    From Australia comes some warning signs that the beef market may becoming overheated, as their feedlots are all suffering huge losses, and analysts suggest a downward adjustment for live sales is sure to come.

    None of these signs have been seen at local calf sales however, as strong pricing has continued through the multitude of sales within the  Canterbury province, but some have decided to shorten the sales term by chasing heavier calves and forward 18 month animals to lessen the risk.

     

    DEER

    Another week of stable schedules, as the PM’s Chinese visit also notes the potential of chilled venison sales to this area, and another opportunity to spread the market away from it’s European dominance.

    Spring chilled negotiations have started report the processors, and they are heartened by suggestions there is less European feral game products this year to compete with.

    Most stags have been out for a month or so know but mild dry weather has not stimulated the roar as much as normal and it will be inteesting to see if this affects conception rates in the farmed animals.

    Saleyard Store lamb

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  • The new trend to construct taller wooden commercial, high-density residential buildings of wood will grow markets for NZ Radiata pine

    By Peter Weblin*

    Export log prices were mixed in April. At some ports (such as Wellington) prices rolled over unchanged from April.

    At most other ports they fell $3-6/JAS m3.

    Wellington now boasts some of the top prices in New Zealand which is a big change from previously trading at a considerable discount to other ports such as Tauranga and Napier.

    Domestic log prices either flat-lined, or were up marginally (mainly pruned log supply). All grades are well-sought after in almost all regions, underpinned by a strong domestic housing market, strong domestic non-residential construction activity and continued strong demand for wood products from Australia, the USA and parts of Asia.

    With the relative stability in the markets at present, Wood Matter’s Log Market report digresses a little this month to contemplate the significance of the global trend of more multi-storey wooden buildings (immediately below) and we also report on a mill visit to Taranakipine (New Plymouth) – later in this report.

    Why is the trend of building taller wooden buildings of relevance to NZ forest owners?

    Around the world, there is an emerging trend to construct taller wooden commercial/high-density residential buildings. Whilst this might seem to have little relevance to forest owners in New Zealand, there is good reason to be interested and excited in this development.

    NZ Radiata pine performs relatively poorly as an unmodified structural sawn lumber (in comparison to, say, Douglas fir and other pines). However, it performs very well as the base wood-fibre for components of multi-storey buildings (and other structures).

    The high-strength pruned log pruned log supply to Tenon for the construction of two massive 40m bridges in the Netherlands is one such example - see "Close collaboration with industry leader".

    Such wood components include cross-laminated-lumber – CLT, laminated veneer lumber – LVL and finger-jointed, edged-glued beams). If you then add the environmental sustainability of NZ Radiata pine (most plantations in NZ are FSC® certified) and the environmental benefits of building with wood (CO2 sequestration, low imbedded energy and good thermal qualities), you can quickly become quite excited about the prospects for NZ Radiata pine. This is important, as these new [global] markets are going to be needed to absorb the increase in harvest forecast to come out of New Zealand over the next 10-15 years - see “Wall of Wood”.

    A recent visit by PF Olsen to Taranakipine (below) reinforces the viability of Radiata pine in remanufactured structurally-orientated applications.

    "It’s only a matter of time until the first timber skyscraper is built”, says Simon Smith of Smith and Wallwork engineers. This picture shows a conceptual rendering of a 300m tall timber skyscraper located in the Barbican, London. Researchers from Cambridge University have teamed up with engineers and architects to propose this unique timber structure to the Mayor of London, Boris Johnson. If constructed, this 80-storey building will dwarf the world’s current tallest building which is 14-storeys (source: Engineering and Technology Magazine).

    Export Log Market

    Log stocks at Chinese log ports are reported at around 2.7m m3, a continuation of a strong downward trend and much lower than many commentators predicted this soon after Chinese New Year. Daily offtake (demand/consumption) has increased through March, averaging 58,000 m3 per day; this level is expected to continue through April and May at least.

    Indian and Korean demand is stable and continues to attract NZ log supply.

    Export log supply from New Zealand is stable with little increase expected over the winter months. Most other supply sources are also stable at lower-than-peak levels. Australia is the outlier with supply volumes up. This however, is not expected to offset the current declining log stock trend in China.

    Supply sources of softwood logs to China. With the exception of Australia and New Zealand, other sources are expected to be either stable or declining (source: globalwood).

    Pruned log demand is proving a little softer than other grades with log stocks in northern China remaining relatively high compared with the Shanghai and Southern China regions. This may be related to China moving into the “sapstain season” where the northern hemisphere summer increases the expression of sapstain on logs which have not been anti-sapstain treated.

    The reduction in NZ$ at-wharf-gate prices in April were due almost entirely to unfavourable movements in NZ$ currency and ocean freight rates.

    The NZ$:US$ cross rate has moved from 0.66 at the start of March to 0.69 at the start of April, having a potential unfavourable NZ$8.00/m3 impact on “A” grade log price (at-wharf-gate NZ port), depending on the degree of hedging an exporter might have. As reported above, the actual impact on log prices was much lower than this. Sentiment on the outlook is generally on the weak side for the NZ$, which will be supportive of log price.

    As reported last month the ocean freight rate firmed a little in March and a firmer tone continued into April. Vessel availability is reported to be a little lower as fewer supra/handy-size vessels are opening in New Zealand with lower fertiliser, feed and mineral imports. A firming oil price and higher consequently bunker prices (fuel oil for log vessels) is adding marginally to higher ocean freight rates. However, the fundamental over-supply of supra/handy-size vessels is expected to keep ocean freight at historically very low rates for the foreseeable future.

    The consensus outlook is stable export log pricing for the next few months. There could, however, be some pricing pressure in June as construction slows during the hot season and harvest time in China.

    Domestic Log Market

    After a three month slump in prices, REINZ figures this last week showed the median house price in Auckland surged $70,000 to $820,000 – the first time to break $800,000. This will be stimulatory for the economy in general, and the house construction and renovation market in particular. In addition, recent media reports (“Here come the Jafas” headlined the Herald on Monday 18 April) Aucklander’s being responsible for around 20% of house sales in nearby regions and the main centres. It appears that most of the activity is investment-related with purchaser’s not able to afford residential property investment in Auckland turning to the provinces for lower-priced, higher yield investment properties.

    Australia, the USA and parts of Asia continue to be strong markets for NZ wood product exporters although the recent appreciation in the NZ$ is crimpling export receipts. In addition, come domestic processors are feeling the pinch at having to pay higher log input costs and not being able to pass these on in competitive markets such as Australia. This could be exacerbated as the Australian property market shows signs of declining.

    Visit to Taranakipine, New Plymouth

    As a first step to commencing operations in the Taranaki Region, PF Olsen met with Tom Boon, CEO of Taranakipine.

    Tom kindly showed Richard Cook, PF Olsen Southern North Island Manager and Peter Weblin, PF Olsen Chief Marketing Officer around the mill.

    The first thing that hits you is that the site is clean and tidy and everyone seems busy and knows what to do. Tom reinforces this “culture” by stooping down from time to time to pick up and dispose of loose items - a short piece of plastic strap or a stray piece of bark.

    The second thing is the manufacturing process. As Tom explained “the first part of the mill is pretty conventional, we are breaking down the log. Then we cut out the bits that down-grade the lumber, and focus on putting it back together.” The result is a wide range of finger-jointed, edge-glued components, many for structural applications (e.g. beams and posts) and many of which have been LSOP treated and paint-finished.

    The main markets for Taranakipine are Australia, New Zealand and the USA. The mill is FSC® certified and Tom is always on the look-out for more FSC® certified log supply which he says can attract a premium price.

    Tom Boon (CEO Taranakipine) and Richard Cook (PF Olsen Southern North Island Manager) inspect finger-jointed lumber awaiting edge-gluing in Taranakipine’s state-of-the art laminating plant.

    After the logs are broken down in a conventional head-rig/resaw and defected, they are then dried, finger-jointed and dressed to produce high-quality, strong and dimensionally stable remanufactured pine.

    The value-added transformation is completed when the wooden pieces are LSOP treated and then painted. These pieces are destined for the Australian market.

    PF Olsen Log Price Index to March 2016

    The PF Olsen log price index fell two points from $122 last in March to $120 this month. It is now $33 higher than its low of $87 in July 2014 and $15 above the two-year average and $17 above the five-year average.

    Basis of Index: This Index is based on prices in the table below weighted in proportions that represent a broad average of log grades produced from a typical pruned forest with an approximate mix of 40% domestic and 60% export supply.

    Indicative Average Current Log Prices - March

    Log Grade $/tonne at mill $/JAS m3 at wharf
      Apr-16 Mar-16 Feb-16 Dec-15 Nov-15 Apr-16 Mar-16 Feb-16 Dec-15 Nov-15
                         
    Pruned (P40) 196 196 195 175 171 195 198 198 195 185
    Structural (S30) 112 112 112 106 103          
    Structural (S20) 98 99 99 98 96          
    Export A           124 128 127 128 111
    Export K           118 122 120 121 106
    Export KI           106 110 108 108 94
    Pulp 50 51 51 50 50          

    Note: Actual prices will vary according to regional supply/demand balances, varying cost structures and grade variation. These prices should be used as a guide only.


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

  • Keith Woodford says predicting a specific season's milk payout price will always mislead; the best we can do is target a range over a longer time period

    Global dairy prices are the 'most unpredictable' - so why is everyone trying?

    By Keith Woodford*

    In recent weeks, the news media has been reporting wildly opposing views on short term dairy prices.

    ASB’s Nathan Penny has been predicting a 2016/17 payment that will start with a ‘6’. In contrast, Westland’s Chair Matt O’Regan and CEO Rod Quinn are saying that they see ongoing gloom for up to two years.  Rabobank see improvement but not until 2017. And Fonterra’s John Wilson has almost apologised for past failures with his acknowledgement that predicting prices is indeed difficult.

    Sheep-meat price predictions have also been wayward in this last season, with spring optimism from the meat companies largely unfulfilled.

    It seems that we never learn that commodity prices are by their very nature inherently unpredictable.  And the more global the market, the more unpredictable it all becomes.  That means that dairy – which has become increasingly global – is now one of the most unpredictable commodities.

    It is time for all commentators who provide estimates about forthcoming dairy prices to emphasise the uncertainties. I have been arguing for some years that all dairy price projections should have a specified range of prices associated with them.

    Early in the season, the range will always be wide. Past history tells us that Fonterra often gets its initial May forecast wrong by somewhere between one and two dollars. As the season progresses, then the range can be gradually drawn in. 

    For example, for the current season, Fonterra should be telling its farmers, not just that the best milk price estimate is $3.90, but that it could end up anywhere in a range of ‘x to y’.   This late in the season, the range should be about plus or minus 20c. 

    Looking forward to the forthcoming 2016/17 season, at this early stage of prediction, the final payout could end up starting with a 3, 4, 5, 6, or 7. Nobody knows, be it Fonterra or the ASB!

    I often hear criticism from farmers about Fonterra’s ability to predict milk prices. But the criticism of Fonterra should not be for getting it wrong. The criticism should be for Fonterra ever pretending that it could get it right.

    I have little doubt that we are going to see good prices again for milk. This is because the best predictor of good future prices is current poor prices. And then further down the track the best predictor of subsequent bad prices will be the forthcoming good prices. But what none of us can predict is the timing. This is because so many random and unpredictable events get in the way.

    Looking forward even a few months, there are lots of uncertainties.  

    If oil prices rise, then the oil-producing countries from the Middle East, plus Indonesia, Algeria and perhaps Venezuela, could come back into play. It’s only a few years back that Venezuela was our biggest market for whole milk powder!  However, their current problems do go beyond oil.

    If the Americans decide that they need Russia as a partner in the Middle East, rather than an enemy in the Ukraine, then the Western countries will remove the financial sanctions against Russia and the Russians will then respond by removing their counter sanctions on European cheese.

    If the Chinese dairy industry reduces its own production owing to current low prices, then they will need more of our milk powder (which is their most economic option). And right now there are indeed some signs that China is increasing its dairy imports; not just whole milk powder, but also butter, cheese, skim milk powder and whey powder. But the data is ‘flakey’.   January data is affected by tariff issues that make it a desirable month to import, and February is always messy because of Chinese New Year.

    Whether any of the above mentioned international events will happen, none of us can be sure.

    And then there is the imponderable as to whether or not Europe will continue increasing production in the face of poor prices. It is clear that many European farmers are losing money, but the timing around the changing balance between those who cut their losses by decreasing production, and those who increase their production so as to spread their fixed costs over more production, is unclear.  Also, there are increasing European inventories to clear. 

    One of the biggest uncertainties always relates to exchange rates. In the short term, all of the companies hedge against the US dollar, and so the impact of any change is minimal.  But after a lag of about six months, the effect of a sustained US exchange rate to the NZ dollar of say 60c versus 80c is worth about $2 per kg milksolids. And within the last ten years we have fluctuated both well below and well above the 60c- 80c range.

    Ironically, the easiest thing to predict is that New Zealand production will decrease next year.  Whether or not that decrease is a smart move is debatable. Most of the farmers I know are actually holding their production, but then they tend to be farmers who are not being pressured by their banks to generate immediate cash. Instead, they are positioning for the longer term. 

    But yes, national production will probably be back 6%-10% next year, with most of the reduction borne by Fonterra. Westland may also receive less milk. Open Country has waiting lists so they should be at capacity assuming they have got their calculations right  However,  Synlait, Oceania and Miraka should more than hold their overall production, by taking in more farmers to fill increasing capacity. Tatua should also hold its production, as its farmers have no reason to hold back. However, it is Fonterra’s declining supply that will dominate at the national level.

    Trying to put all of the global forces together is like working through a maze. On balance, my own judgement is that there will be gloom through into 2017, but then prices will hopefully rise. But that is not a prediction. Rather, it is a hope which, finger crossed, will come true. The rise could even come earlier, but that seems unlikely without soaring Chinese demand.

    Looking out further, I am often asked as to what I think the average prices will be for milksolids over the next ten years. If pressed for an answer, I will typically suggest somewhere in the sixes.  But in reality I am being asked the wrong question, or at best, I am being asked just the first part of the right question.

    What people should also be asking, is what are the likely lows and highs the next ten years. If they were to ask that question, I would say that the lows could well be less than $4 and the highs could well be at least $8.  But I don’t ever recall anyone ever asking me what I think those lows and highs will be. And that tells me that as an industry we have not really come to terms in our thinking about global commodity markets. 

    Commodities, global markets, production cycles, disruptive events and price volatility all go together. It is the nature of the commodity game.

    Somewhere ‘out there’ are some potential disruptive events, both positive and negative, which none of us have thought of. Or there could be events which some have given warning of, but which conventional wisdom has dismissed.  I see the biggest risk, which most people are currently ignoring, as being a chill over global dairy markets from forthcoming issues with A1 beta-casein.  With new science now coming through, I am watching that closely.


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

  • Global demand for New Zealand wine tipped to grow in 2016 – with larger producers set to take advantage: Rabobank

    Content supplied by Rabobank

    Rising global demand for New Zealand wine points to further export growth for the industry in 2016, and it’s the country’s larger wine companies likely to reap the benefits, according to a new industry report.

    In its recently-released Wine Quarterly Q2 2016 report, agricultural banking specialist Rabobank says demand growth for New Zealand wine is expected to continue in 2016 with the country’s cool climate wine styles and premium positioning remaining very much in favour in most major export markets.

    Report co-author, wine analyst Marc Soccio says consumers in major wine markets across the globe appear willing to pay up for more expressive and lighter-bodied wines such as those produced in New Zealand.

    “And there is little evidence of this trend reversing any time soon. In fact, the growing role women and younger generations play when it comes to purchasing decisions only seems likely to support it further.” he says.

    Mr Soccio says the positive news for the New Zealand wine sector on the demand side was also being matched by good news on the supply side, with the 2016 production volumes of New Zealand wine grapes expected to be significantly higher than in 2015 although within a manageable range.

    “The volume of the 2016 vintage looks like it will be just right – it won’t be too big, yet it also won’t be too small for most companies entering the year with stocks erring on the tight side,” he said.

    Larger wine companies advantaged

    Mr Soccio says while there are a number of positives for the industry, there was some concern that the apparent upside is becoming increasingly concentrated in the hands of the country’s largest producers.

    “One of the key factors favouring New Zealand’s larger producers is their ability to source suitable distribution in key growth markets and channels. This is especially significant given the US, where distribution is so crucial to success, edged out the UK as New Zealand’s largest export market in 2015,” he said.

    “As New Zealand wines move further and further into the off-premise channel, scale becomes an increasingly important factor to attract distribution and drive the sort of cost efficiencies needed to invest behind your brands in the market.”

    Mr Soccio says a further factor, which placed New Zealand’s larger wine producers at an advantage over smaller domestic competitors, was their capacity to supply a greater proportion of their own grape requirements, both now and into the future.

    “What is becoming increasingly evident is that a combination of limited market opportunity and limited access to cost-competitive supply is placing pressure on the profitability of small to mid-sized wine companies,” he said.

    As a result, Mr Soccio says, industry consolidation is likely to gather pace over the coming years, as mergers and acquisitions seek to more profitably employ the assets of smaller independent firms struggling to compete and grow.

    Over-reliance on Marlborough sauvignon blanc still small, but real, risk

    Although the demand outlook for Marlborough sauvignon blanc is strong, the report also notes concerns are held about the risk of New Zealand wine’s over-reliance on one region/variety.

    “Despite its popularity, the high degree of exposure that the New Zealand wine industry has to one variety from one region still makes its fortunes the subject of great conjecture,” Mr Soccio says.

    “This risk is still small, but increasingly real, with no shortage of cautionary examples of ‘shooting stars’ within the global wine market over the years. Inevitably, demand for Marlborough sauvignon blanc will indeed plateau and even wane in markets and therefore it’s important that the industry looks to put investment behind other products.”

    Mr Soccio says the success of Marlborough sauvignon blanc made it difficult for other regions and varieties to compete for capital but, nevertheless, some investment in other varieties and New Zealand regions was taking place.

    “Marlborough wine companies are having notable success with pinot noir and pinot gris, while other regions, such as Hawke’s Bay and Central Otago, have their own diverse offering to bring to market, and they will continue to benefit as Marlborough-based companies seek diversification benefits elsewhere,” he says.

    Global supply and trade flows

    Looking more broadly at the global market, the report says the balance of global stock levels entering 2016 looks considerably different at opposing ends of the market.

    “The lower end of the market – generic and basic wines – continues to contend with surplus supply, while stocks of super-premium wines remain a bit tighter across many regions,” Mr Soccio said.

    Looking ahead to the 2016 vintage, Mr Soccio says indications point towards a lighter crop for the southern hemisphere in 2016 with Chile, Argentina and South Africa facing significant falls in production,

    “On the demand side, the US saw a strong rise in imports in 2015 assisted by the stronger US dollar, while there was also a notable rebound in import demand in the Chinese market,” he said.

    "Bottled wines from more premium suppliers (especially Italy, France and New Zealand) continued to grow strongly in the US market, while bulk wine import volumes were generally soft, down four per cent year on year.” 


    The full Report is here.

  • Global dairy prices rose 3.8% in latest auction, but the strong Kiwi dollar again gobbled up most of the gain; key Wholemilk powder prices jumped up 7.5%

    By David Hargreaves

    Global dairy prices have moved up again, with last night's GlobalDairyTrade auction seeing an overall 3.8% climb, though virtually all of this was neutralised by an again rapidly rising New Zealand dollar, which has pushed up through US70c.

    But importantly, in what was the second consecutive auction of rising prices - the first time that's happened this year - the crucial Whole Milk Powder prices gained 7.5%, which will be of encouragement to farmers in the middle of a second bad season in a row. See here for the full dairy payout history.

    The WMP average price, at US$2,156 per metric tonne, hit it's highest level since the end of January. This puts the price now 35.6% ahead of last year's low point of US$1590 recorded in August. However, to put it in perspective though, the current WMP price is still 6.4% below where it started this year at, and some 23.7% below where it was in October after what proved a short term rally.

    ASB economists are picking an opening milk price forecast of $5 from Fonterra for the next season, with that figure to grow as the season goes on. Westpac economists are more cautious, with a price pick of $4.60 for the next season, though say that last night's auction results suggest "some upside risk" to their forecast.

    In terms of the current season, Fonterra's forecasting a full-year dividend of 40c, for the current season/year, which coupled with the present forecast milk price of $3.90, would give its farmers a total payout for the year of $4.30. In 2015 Fonterra paid a dividend of 25c and the milk price was $4.40, giving a total payout of $4.65.

    Many farmers will have been operating below breakeven for the past two seasons, which has raised concerns about rising foreclosures and falling dairy farm prices.

    ASB rural economist Nathan Penny said dairy prices have taken a "small step towards recovery".

    "...And while seasonal factors are in play, the developing trends are consistent with our view of what we expect to see over the new season. Namely, we expect NZ farmers to continue to lead the production response to low milk prices. And as NZ production falls, we expect to see prices for NZ-dominated products to recover first."

    Penny said elsewhere globally, the response to low prices is slower, but in places like the EU the response is happening.

    "When this slower response does kick in, we expect global prices to get a second wind from higher skim milk powder prices and milk fat prices.

    "On this basis, we expect Fonterra’s opening 2016/17 season milk price forecast (announced in late May) to be near $5.00/kg. But as prices rise further during the season, we expect the milk price will ultimately end the season at around $6.00/kg."

    ANZ agri economist Con Williams and senior FX strategist Sam Tuck said the push up in WMP prices, with later-delivery contract prices recording even bigger gains than the average 7.5% rise, would provide Fonterra with some comfort that US$2,500/t for WMP by the end of the year is achievable.

    "The continued strength of the [New Zealand dollar] will be a concern, but it also needs to be remembered Fonterra will have a significant amount of hedging already done around the mid-0.60s for next season. While we remain cautious, we do think there is a higher chance that WMP will outperform the rest of the dairy complex over 2016/17."

    They said the three things they are watching are: New Zealand supply, oil prices and Chinese import demand.

    "New Zealand supply is expected to be under further pressure in 2016/17 due to lower cow numbers and farm management/system changes. Oil prices are off their January lows and fundamental drivers (i.e. lower US supply) are pointing to further improvement over the second half of 2016. In China, supply appears to also be easing back as high production costs and falling milk prices squeeze returns to milk producers. Imported WMP is also very attractively priced compared with domestic Chinese product."

    Williams and Tuck said they remain "cautious on China as it is still somewhat a black box", but as we move past the seasonal peak in local supply, import demand is expected pick-up.

    "The NZX futures curve has been anticipating a further lift and it now looks like the physical market (GDT auction) is starting to reflect similar sentiment. That said, there are still plenty of challenges for the rest of the dairy complex and this will somewhat cap the performance of WMP. After last night’s auction, WMP is now more fairly priced versus buyers using a skim milk powder/milkfat product mix – before it was the cheaper option.

    "For SMP, European intervention is anticipated to be full by the middle of the year after its earlier announcement to double the volumes it takes to 218,000MT. This product will need to be re-sold at some point, which is anticipated to cap pricing for some time. Last night’s auction result continued to reflect this."

    Westpac senior economist Anne Boniface said while any improvement in dairy prices is good news for the sector, prices remain 12% below where they were a year ago, and more than 30% below a five year average.

    "Low dairy prices are starting to dent confidence in both the agricultural sector and beyond. Surveys of business confidence have taken a step down in the first quarter of this year as businesses beyond the agriculture sector contemplate just what the cost cutting on farm and reduced investment might mean for them," she said.

    "Our own survey of regional confidence showed distinct differences between downbeat dairy dependent regions and their more diverse neighbours. Even workers have adjusted their outlook. Those in rural centres are noticeably more downbeat about employment prospects than their urban counterparts."

    Boniface said Westpac economists expect to see further downward pressure on farm prices, particular dairy farms.

    "That’s even taking into account our forecast that dairy prices will gradually improve over the next couple of years."

  • Lower prices, lower processing volumes, and lower profitability casts a pall over the meat export situation in the second half of 2016

    By Allan Barber*

    B+LNZ’s Economic Service has analysed meat exports for the first six months of the 2015/16 season and the figures show what might have been anticipated.

    The weaker NZ dollar did not decline enough to compensate for lower beef shipments and a fall in the overseas market prices for both beef and sheepmeat.

    Beef shipments were down 3.7% while the value fell 6.1%, although the entire drop happened in the second quarter; chilled beef exports were well ahead of the first quarter twelve months earlier with sales to North Asia showing a 55% increase. Exports to China and Taiwan were responsible for a 24% increase to North Asia for the six month period as a whole.

    The overall decline was almost entirely due to lower tonnage and value of frozen beef exports, particularly to North America.

    Lamb export tonnage rose by 5.9% because of the early processing season with sales to North Asia and Europe rising by 11% and 7.2% respectively, with the increase attributable to chilled lamb which represented 29% of total tonnage compared with 27% a year earlier. The average value of lamb fell by 4.2%, but this was cushioned by the weaker dollar by about 10%.

    Mutton shipments were slightly ahead of the previous year, although the average value was down by 10%, with all regions showing a weaker trend. North Asian exports were well down, but this decline was offset by increased sales to Europe, South Asia and North America.

    The total value of meat exports was 4.4% down on the previous year with the total tonnage marginally up, the difference being due to the fall in market prices cushioned by the weaker NZ dollar.

    The outlook for the second six months does not look as favourable as the first half for several reasons: the volume of chilled lamb will be down considerably with no Christmas or Easter trade, prices have fallen across the board since the end of 2015, and the total lamb kill will be approximately 1 million down on last season in spite of the larger than usual pre Christmas processing volumes.

    The word out of the far south suggests this will not be a vintage profit year for the processing and exporting sector, so for the time being at least the figures for the first six months may be about as good as it gets. A rise in global market demand and a further drop in the value of the NZ dollar will be necessary components of any improvement.


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

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