By Keith Woodford*
Silver Fern Farms announced last week to its farmer suppliers that it now expects no more than a breakeven return for the year ending 30 September. This should focus the minds of its farmer shareholders, who vote on 12 August as to whether or not Silver Fern Farms should proceed with the partial takeover by Shanghai Maling.
The disappointing projected financial outcome – which could yet get worse - reinforces the notion that Silver Fern Farms lacks the necessary financial resilience to go it alone. There is increasing risk that without completion of the Shanghai Maling buy-in, that Silver Fern Farms will lose the support of its bankers and be placed in receivership. That is not an attractive option, for what has in recent years been New Zealand’s largest meat processor.
Last September I wrote that the Shanghai Maling deal was a very good one from the perspective of its New Zealand farmer-shareholders. It valued the shares, at that time trading at 35c, as being worth about $3. And it provided the capital to do the necessary restructuring of the company, including upgrading some plants and closing down others, plus market development.
Farmers supported the deal at the time, with 82% voting in favour based on a 67% turnout. This support was despite a widespread understanding that, although structured as a 50/50 deal, in reality Shanghai Maling would be in effective control. But since that time, the seeds of doubt have been sown.
In the last 10 months, I have watched events from the sidelines, as disaffected shareholders, led by John Shrimpton but with others standing both alongside and behind him, have lobbied for a reconsideration of the deal.
The essence of their argument has been that last year’s better than expected profit of $24.9 million post tax (announced after the deal was voted on) proved that Silver Fern Farms could either go it alone or else prosper with a much smaller shareholding sold to Shanghai Maling or others. The argument was bolstered by the headline that that Silver Fern Farms reduced its debt last year by some $168 million. But what got lost in the rhetoric was that Silver Fern Farms ended the last financial year with very little inventory, and that was the key reason for the debt reduction.
Come the new (current) season, Silver Fern Farms still needed to borrow several hundred million dollars of working capital to go with the $121 million of hard core debt at season opening. This funding has been provided by the banks, but it is a one-off facility on the assumption that the Shanghai Maling deal goes ahead.
Although Silver Fern Farms may well be a leaner and more efficient operator than was the case prior to 2015, the company, while standing alone, remains just one bad year away from a financial disaster. And taking the last five years in aggregate, the losses have exceeded the profits. With this year added in, it is looking like six years where overall losses exceed overall profits. This is not a healthy company.
These latest financial projections should surely convince wavering farmers to renew support for the deal. However, with the ongoing delays in approval by the Overseas Investment Office (OIO), new risks are emerging.
These ongoing delays show the Overseas Investment Office in a very poor light. How is it that the decision has dragged on for what is now upwards of a year? The inability of the Overseas Investment Office to act expeditiously on this and other applications is now acting as a major dis-incentive to other overseas investors considering investing their capital in New Zealand agribusiness. It is hard to characterise the delays other than as a mix of bureaucratic and institutional paralysis.
The Overseas Investment Office has stated that currently their hands are tied until Shanghai Maling provides additional information. But there is surely a story behind that.
The drum beats that I am hearing out of Wellington are that it is the good character test that is holding things up. The Overseas Investment Office has been embarrassed by disclosures that it had approved investments by an Argentinian of doubtful character, and without doing rigorous due diligence. The blow-back from that has been the Overseas Investment Office developing new procedures on the run.
The Government now needs to look closely at the messages that these delays send to the wider investing community. What is needed are transparent and explicit rules, followed by quick decisions.
Last September I was in Beijing at the time the Lochinver Station application from Shanghai Pengxin was turned down by the New Zealand Government. I was there as member of the New Zealand China Council delegation led by Minister Steven Joyce.
Minister Joyce reported that at his private meeting with the Chinese Premier Li Keqiang he had been questioned as to the broader implication of the Lochinver Station rejection. He had to try and explain that the Lochinver rejection was a ‘special case’ and that Chinese investments were indeed welcome. The argument at the time was that New Zealand operated a rules-based system, but subsequently it became apparent that it was Ministers Paula Bennett and Louise Upston who rejected an approval recommendation from the Overseas Investment Office. That did not look good over in Beijing.
The broader response from our Chinese colleagues at the Forum was more than raised eyebrows. I therefore returned to New Zealand with a clear personal judgment about the Silver Fern Farms application, which back then was about to start the first stages of its approval journey. It seemed evident to me that any rejection of the Silver Fern Farms proposal by the Overseas Investment Office would signify an effective fracturing of the special relationship that has existed between New Zealand China in recent decades. It would be the final straw.
Now, some ten months later, the application is still caught somewhere in the system. Shanghai Maling have agreed to a further three-month extension, but it would be understandable if they were to walk away should they decide that the business environment has now changed, and that doing business in New Zealand has become too difficult.
The history of New Zealand’s special relationship with China is not widely understood. It can be traced back to that iconic New Zealander Rewi Alley who first went to China in 1927 and lived there until his death in the 1987. Although often pilloried in New Zealand throughout the 1950s, 60s and early 70s for his political leanings, it was Alley who built enduring links.
I first met Rewi Alley in 1971 when I interviewed him on the day of his 74th birthday during a trip he made back to New Zealand. And then I met him again in Beijing in 1973. He was truly a remarkable man. At times life must have been very difficult, not least in the early days of the Cultural Revolution when many things went crazy. However, in amongst the turmoil, Premier Zhou Enlai protected him from some of the worst excesses, including very publicly at one stage coming down from the Praesidium to sit with Rewi Alley at a major sporting event. It was an indication that Alley was his personal friend and was not to be touched.
From those foundations, New Zealand has been recognised in China for a series of supportive actions. In particular, New Zealand was the first country to support China’s entry to the WTO, and subsequently was also the first country to recognise China as having a market economy. The Chinese remembered the positions New Zealand took, and this surely influenced the decision by China that New Zealand would be the first developed country with which it would negotiate and sign a free trade agreement.
Since 2008, New Zealand has benefitted greatly from that FTA. It was not so much the reduction of tariffs although they were important, but the message it sent to Chinese companies that the Chinese Government supported business relationships with New Zealand. More recently, New Zealand gained further respect for firm but deft handling of the melamine crisis at the time of the Beijing Olympics.
However, right now in 2016, the New Zealand China relationship seems somewhat more fragile, with significant irritations on both sides. In the greater scheme of things, the ongoing delays with the Shanghai Maling application cannot be helpful. If this deal falls over as a consequence of decisions made within New Zealand, then there will be implications for all New Zealand agribusiness industries. As I have said many times before, the New Zealand economy looks very shaky without a strong working relationship with China.
Assuming the Shanghai Maling application is approved, and the deal finally consummated between the business partners, then there are prospects are for a more robust meat industry in New Zealand.
There will still be the fully New Zealand owned Alliance Co-operative; there will be the New Zealand owned AFFCO controlled by the Talley family; there will be the largely Japanese owned ANZCO, and there will be the Chinese controlled Silver Fern Farms. And then there will still be a myriad of smaller companies, both local and overseas owned.
I look forward to seeing which business models prosper in that environment. There is no attractive alternative. So let’s get on with it.
Keith Woodford is Professor of Agri-Food Systems (Honorary) at Lincoln University and a Senior Fellow (Honorary) of the NZ Contemporary China Research Centre. His archived writings are at http://keithwoodford.wordpress.com
By Allan Barber*
Last week’s profit warning from SFF chairman Rob Hewitt confirmed what industry observers suspected – this season has been affected by a combination of factors which has made achievement of the budgeted profit more remote than ever. At the half year Hewett had already warned the year end result would be materially different from budget without specifying numbers. The latest warning indicates break even at best.
The current season has suffered from reduced livestock volumes, regular rain and grass growth in most parts of the country which even out supply patterns, and an obstinately strong NZ dollar. Processors have been squeezed at both ends, paying too much for livestock and not earning enough from the market.
Against this background, the SFF shareholder meeting set for 11 August appears ever more futile and damaging to the company’s interests. Last week’s press release reiterates the board’s frustration and disappointment with the actions of a small group of shareholders who have requisitioned a special meeting in an attempt to overturn the deal with Chinese company Shanghai Maling.
“Subject to Overseas Investment Office approval, Silver Fern Farms is bound to complete the transaction with Shanghai Maling. This meeting – whether the resolution is passed or not – cannot change that.
“The Status quo is not an option. Our disappointing financial performance this year illustrates again the volatility of the industry and the risks associated with our current capital structure. We remain under lender pressure to address these issues.
“The Board believes Messrs Shrimpton and Gallagher do not appreciate, and so are not fairly or accurately representing, the prospects and risks of any refinancing and restructuring the Co-operative would need to undertake should the Shanghai Maling investment not proceed.”
When I spoke to John Shrimpton several months ago, he was adamant SFF had failed to disclose relevant financial information to shareholders before holding meetings as a result of which it gained 82.5% of votes cast in favour of the transaction. He claimed the vote did not comply with the constitution which required a 75% vote at a special meeting.
The substance of the requisition was that SFF’s financial position at the end of the September 2016 financial year was significantly better than stated and consequently did not carry the risk of a banking foreclosure as claimed by the company. Unfortunately the 2017 budget painted a rosy future which, if achieved, would have further minimised the probability of banking facilities being withdrawn.
Of course what the banks knew, as did everybody else with experience of the meat industry’s volatile profitability, was that every season is different and two good years very rarely happen in succession. However, for reasons which appear to be driven more by bloody mindedness than logic, Shrimpton and his group remain determined to inflict as much damage on SFF as they can.
Following the announcement of Shanghai Maling’s intended investment of $261 million, SFF’s shares have risen in value from 35 cents to a level nearer their issue price of $1, but that doesn’t seem to be of any interest to the requisitioners. They appear to be more interested in destroying the company than in securing its future, because if they are successful the board would have to resign, the banks would withdraw support and the staff would be in limbo. Would anybody fancy the idea of Shrimpton and Gallagher as chairman and deputy with their obviously intimate knowledge of running a meat company?
The most sensible outcome will be resounding shareholder support for the transaction and a positive OIO decision. The latter will secure SFF’s future as a well-capitalised meat processor and exporter.
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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 email@example.com or read his blog here ».
By David Hargreaves
A high-powered report outlining global agricultural prospects for the next 10 years sees only slow improvement in global dairy prices over that period - and no return to the highs of the recent past.
Labour's finance spokesperson Grant Robertson says the report suggests dairy farmers here won't reach breakeven till 2019 at the earliest and says there are serious implications for the dairy sector and economy.
The OECD-FAO Agricultural Outlook 2016-2025 and the accompanying more detailed break-out section on dairy predict that over the next 10 years, it is expected that real dairy product prices "will increase slightly".
"Nevertheless, real prices will remain below average prices of recent years, but substantially higher than in the period before 2007," the report says.
Recent global dairy prices have remained flat at low levels, with the key Wholemilk powder price most recently averaging US$2079 a metric tonne.
According to the OECD-FAO report, WMP prices averaged US$3647/t through 2013-15 - but the report doesn't see prices getting anywhere near that again in the next 10 years.
The report forecasts the price to hang around in the region of US$2600 till 2019, and gradually moving up to break the US$3000 mark by 2022, as shown in the below graph and abridged table underneath. Bigger versions are available here.
Robertson said that for dairy farmers to break even they need a whole milk powder price of "at least US$2650 a metric tonne" at current exchange rates.
"The OECD’s forecasts push that break-even point back until 2019 at the earliest.
“This has serious implications for the dairy sector and the wider New Zealand economy - dairy’s total direct and indirect contribution to the economy is at about 5 – 6 per cent according to Treasury analysis. Dairy farm debt has risen to close to $40 billion, and represents 10 per cent of bank’s loan books.
“In this scenario farmers will not be in a position to reduce debt anytime soon. In fact they will require significantly more borrowing for a sustained period, which banks may well have concerns about."
Lower for longer
The 'lower for longer' scenario portrayed by the OECD-FAO report squares with some research and projections that have been made in New Zealand too. ANZ economists warned just on a year ago that dairy farmers will get prices for their milk that are 5%-8% lower on an ongoing basis than they have been in the past.
The OECD-FAO report says that world milk production is projected to increase by 177 Mt (23%) by 2025 compared to the base years (2013-15), corresponding to an average grow rate of 1.8% p.a. which is below the 2.0% p.a. witnessed in the last decade.
"The majority of this growth (73%) is anticipated to come from developing countries, in particular India and Pakistan. This expansion of production is largely in fresh dairy products, which will grow at 2.9% p.a. in developing countries, and predominantly supply domestic markets. At the world level, production of the main dairy products (butter, cheese, SMP and WMP) is increasing at similar pace to milk production, albeit more slowly than that of fresh dairy products."
But in contrast, milk output growth is expected to be constrained in New Zealand, the largest milk exporter, compared to the previous decade, with growth slowing from 5.1% p.a. to 2.1% p.a, the report says.
NZ 'influenced by China'
"As the majority exporter of WMP, New Zealand was particularly influenced by China’s sharp decrease in WMP imports leading to decreased producer prices. This, combined with adverse weather conditions and environmental constraints, has led to a reduced production potential. Most of the growth will come from a further increase in the dairy herd (1.6% p.a.) as the mainly pasture-based, extensive milk production system implies a continuation of low yield per dairy cow. Furthermore, due to rising prices for beef meat, non-dairy cattle will compete for land-use in the future."
Per capita demand for dairy products in developing countries is expected to grow consistently over the medium-term, supported by rising incomes and lower dairy prices relative to their 2013 peak.
"As seen in previous years there is a continued shift in dietary patterns away from staples and towards animal products, due to changes in diets. Strong consumption growth is expected across several markets in the Middle East and Asia, including Saudi Arabia, Egypt, Iran and Indonesia, with the per capita consumption of dairy products in developing countries growing between 0.8% and 1.7% p.a., the lowest growth being for cheese and the highest for fresh dairy products. In addition, per capita consumption in the developed world is expected to grow between 0.5% for fresh dairy products and 1.1% p.a. for SMP."
A key uncertainty
In terms of some of the uncertainties, the report says China’s role as a key importer of many traded dairy products is a "key uncertainty" in the future developments of world dairy markets.
"China’s domestic milk production has continued to increase, along with investments in processing capabilities. If China resumes imports at 2014 levels, this would have a significant impact on the markets for milk powders.
"On the other hand, China could become further self-sufficient, supplying much of its demand for dairy products domestically, although current low prices do reduce the attractiveness of investments in dairy processing."
Treasury has floated the idea of forcing agriculture to be included in the Emissions Trading Scheme (ETS).
It has raised the possibility of obliging farmers to join other businesses in paying for their carbon emissions in a briefing paper it prepared for Finance Minister Bill English, and Associate Finance Ministers Steven Joyce and Paula Bennett on March 18.
The paper focuses on the economic implications of removing the one-for-two subsidy, which allows some businesses to pay one emissions unit for every two tonnes of pollution they emit.
Climate Change Minister Paula Bennett in this year’s Budget (announced on May 26) said the subsidy would be phased out over three years.
The Treasury paper recognises this will reduce the “fiscal risk to the Crown presented by the stockpile of around 140 million New Zealand Units (NZU) held in private accounts, which could be carried over into the 2020s and used by ETS participants to meet their surrender obligations.
“As these NZUs cannot be used by the Government to meet its 2030 climate change target, the Government may be required to purchase eligible international units to do so.
“This represents a fiscal risk, the size of which will depend on carbon prices in the 2020s. At a carbon price range of $25-$50, this would be $3.8-$7.5 billion over 2021-2030,” Treasury says.
Furthermore, Bennett says removing the subsidy will add another $356 million to the government’s books over the next four years, based on a New Zealand Unit price of $12.
But there’s a “but”.
Treasury says that even with the subsidy removed, there will still be a stockpile of 32-51 million units, which at a carbon price of $25, represents a “fiscal risk of $0.8-$1.3 billion over 2021-2030”.
To address this, it recommends the government seek advice on “placing surrender obligations on the agriculture sector”, among two other options.
Treasury does not go on to analyse its suggestion for the government to consider including agriculture in the scheme, but admits this has “significant downsides”.
Radio New Zealand reports Morgan Foundation general manager Geoff Simmons saying it is only a matter of time before the government will have to do something about agriculture.
"If we don't take action on agriculture and free allocation then the whole entire rest of the economy has to be carbon neutral by 2030, now obviously that isn't going to happen so I think the government is waking up to the realisation that because of these two risks we are going to have to take action on agriculture."
Yet Federated Farmers isn’t having a bar of the suggestion.
Its climate spokesperson Anders Crofoot told RNZ the ETS was a blunt tool and making agriculture part of the scheme would make New Zealand farmers less competitive internationally.
He said New Zealand farmers were efficient producers - meaning they emit less greenhouse gases for the amount they produce.
Furthermore, if New Zealand's trading partners were doing something similar, farmers would be more accepting of being part of the ETS.
Crofoot also told RNZ methane and nitrous oxide, predominantly from agriculture, needed to be treated differently from carbon dioxide.
Late last year then-Climate Change Issues Minister Tim Groser said the Government had begun a review of the ETS, but the full inclusion of agriculture "remains off the table at present."
By Allan Barber*
Last month I took a positive look at the prospects for New Zealand’s sheep and beef producers, based on the long-term outlook in global, especially Asian, markets.
I drew attention to some caveats including market access, seasonality, exchange rates, the robustness of the cool chain and fluctuating demand. But what a difference a month makes!
In the short-term the outlook for next season looks considerably murkier as a consequence of global uncertainty which has caused the New Zealand dollar to move in a direction diametrically opposite to economists’ forecasts. At 73 US cents, 56p and 66 Euro cents something has to give. At the moment when plant throughputs are low, processors are paying what they must to secure supply to cover commitments, but at those procurement prices they will be losing quite a large margin and cannot continue doing so for long.
Meat companies do not tend to buy much foreign exchange cover other than what they need to cover commitments at their current procurement cost; banks view forward cover beyond this to be speculation, as it would equate to gambling on the direction of exchange rate movements.
The latest performance alert comes from Blue Sky Meats which has released its 2016 annual result for the 12 months ended 31 March and its after tax loss of $1.957 million contained a salutary lesson in the change from the previous year’s profit of $1.24 million. At the pre-tax level there was a negative swing of $4.46 million because of the effect of the income tax loss in the 2016 year.
Although closure for a planned plant capital upgrade at the company’s Gore beef plant adversely affected its ability to process cull cows when they were available, sheep meat processing also failed to contribute to profitability. In his report to shareholders Blue Sky’s chairman Graham Cooney lamented a number of factors including under-utilisation of assets, the challenge of handling peak throughput while providing a 12 month service to suppliers and payment of cartage and third party procurement costs. These last two costs are not recoverable, but are a fact of life in the deep south.
This neatly sums up the recurring difficulty of operating efficiently and profitably in the New Zealand meat industry. Blue Sky’s result covers a later period than ANZCO’s December year and the two cooperatives’ September 2015 year, suggesting it may be a better predictor of future industry performance for the present season and probably next as well. However, Silver Fern Farms chairman Rob Hewett’s warning in March of a materially worse result than budgeted was an early admission of the disappointing nature of the current season.
Since Hewett’s early warning global conditions have become less predictable which makes the SFF requisitioning group’s position even less tenable than before: if the group achieves its objective of preventing the Shanghai Maling deal from being finalised, the onus will fall back on shareholders to stump up enough capital to fund the company through yet another downturn. Even though SFF is confident the requisition has no chance of success, it would be helpful at a difficult time if this uncertainty were removed.
There are several uncertainties facing all exporters, not only meat exporters, not least of which are the strong dollar and economic uncertainty in most of our markets. Not long ago the US Federal Reserve was about to start lifting interest rates as a signal the economy could finally cope without quantitative easing (or printing money), but this now looks most unlikely to happen this year or even next. US beef prices are static and show little sign of increasing, although supply from New Zealand and Australia is low. Importers are nervous of being stuck with large inventories in case the price drops further.
The UK has voted to leave the EU, but that is the only certainty about Brexit. Negotiations haven’t even begun yet because the UK government must choose the point to activate Article 50 when the clock will start ticking on the two year exit timetable. Except no country has done it previously, so nobody knows if it will take two years or ten to complete the process. In the meantime, uncertainty is forecast to result in a recession in the UK which may also spread to the anaemic EU economy, producing a detrimental impact on our lamb exports to New Zealand’s most important market.
On a positive note, demand for lamb and mutton looks increasingly buoyant in countries other than Europe. China’s sheep meat purchases have increased in both volume and price this year, although Australian exporters’ share of imports has risen at New Zealand’s expense. Prices on some items have risen by 25-30% which is encouraging. But the Chinese economy has yet to prove it can avoid a hard landing, while its central bank is busy devaluing the yuan at a rate which will cause more than Donald Trump’s eyes to water.
The Middle East, a traditional consumer of sheep meat, shows signs of willingness to import from New Zealand, while EU member Poland’s lamb imports have increased by more than 50% year on year, admittedly from a relatively low base. The rise in Polish consumption has been caused by higher disposable income and an 18.2% compound annual growth rate between 2008 and 2014, as well as a massive drop in lamb production from 5 million a year in the 1980s to 50,000 now. New Zealand is Poland’s biggest source of lamb imports, but the UK and Ireland come next with the UK increasing its share from 6.5% to 19% in the latest year.
Meat companies will soon be setting their budgets for the 2016/17 season and will not intentionally budget for a loss which means the cost of livestock will have to reflect current market conditions. This suggests a lower starting point than this year, but only time will show whether suppliers are willing to sell at the new levels.
Next season will not be easy for farmers, processors and exporters alike.
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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 firstname.lastname@example.org or read his blog here ». This article first appeared in Farmers Weekly and is here with permission.
Visually it appears that in Canterbury volumes of crops look over supplied for the dairy sector but this will be dependent on late July August weather and history shows that demand can change fast.
While in the north many farms are approaching calving using grass only without supplements thanks to a lower stocking rate and mild winter.
Many have grass storage and cow condition ahead of the norm, and early prospects look good for calving and early milk flows.
All areas except the east of both islands have had sufficent winter moisture and above average temperatures have made this winter more favourable for stock.
Early calves are now arriving in Northern areas and bobby calf processors gear up for the start with early market signals indicating returns could be back on last year.
However calves with strong Freisian and beef genes have shown strong interest at the saleyards and this looks a more profitable option than harvesting for veal and calf skins.
Market sentiment has changed little, with the future determined by production out of Europe and the US, and stocks on hand through the intervention scheme of the EU.
Export sales have fallen from the US as more is consumed domestically but with the EU's export share lifting 11% and more sitting in stocks awaiting supply shortages, trends from this area at present seem to be most influential in the global dairy market.
Another auction this week will reveal another snapshot of where the market is at, and give farmers an indication when prices will improve.
Last nights stable result, albeit with a small lift in whole milk powders, further illustrated that dairy farmers will have to survive another year of non sustainable returns, and will be at the mercy of the banks as to their future.
Fonterra reports they have made good progress on stocks carried, as volumes held are back on last year, and coupled with some cost savings and more valued added production, management believe they have set the tools for the upturn.
Dairy real estate prices have dropped 15-20% from the highs, but some analysts believe more falls are possible when additional properties are marketed in the spring.
The NZ Super Fund has purchased 7 dairy farms in Southland showing the sector they believe the future has an upside, but critics suggest they have paid too much, too soon.
PKE prices drop again as usage falls, and this in turn has sapped demand and prices for feed barley, which is now the lowest it has been for 6 years.
Westland have appointed their independent director Brent Taylor as an interim CEO, as they carefully search for the right person to lead this West Coast company out of these tough times.
By David Hargreaves
Dairy prices were flat in the latest GlobalDairyTrade auction overnight, with an average price of US$2336 per metric tonne and the GDT Index unchanged.
But with no immediate sign of strong improvement in the prices, ANZ economists see the current price levels as implying that Fonterra will have to downgrade its current milk price forecast of $4.25 per kilogram of milk solids for the current season when this forecast is reviewed next month.
The key Wholemilk Powder price gained 1.9% overnight, with an average price of US$2079/t. There was some encouragement within the overall WMP pricing in that contracts for later delivery showed increases of over 3%, which was an improvement on the trend seen in recent auctions.
ANZ agri economist Con Williams said prices for product to be delivered in the near-term were generally under pressure, but there was more positivity for later-delivery periods.
"The WMP curve regained a small upward slope, which was positive given how flat it had been recently and the higher seasonal volumes currently being sold."
In terms of Fonterra's update to its opening milk price forecast due next month, Williams said the dairy co-operative's last two major updates had seen "spot market pricing" used.
"If this approach continues, it would imply a downgrade, with international prices having moved lower since May and the currency higher – a bad combination," he said.
"While this will continue to weigh on sentiment, any downgrade is unlikely to affect 2016/17 cash flow projections materially though."
Fonterra made its current price forecast on May 26, at which time it also re-affirmed an expected price of just $3.90 for the recently completed season. Farmers are looking at their third consecutive season of potentially below break-even prices. See here for the full dairy payout history.
The high value of the Kiwi dollar has indeed been causing concern and not just for dairy farmers, with the Reserve Bank last week most unusually announcing it would give an updated economic assessment, due tomorrow. The clear inference to be drawn was that the central bank was unhappy with the high dollar and was likely to indicate an interest rate cut in its next review on August 11.
One of the key sticking points seen in the market to the RBNZ cutting the Official Cash Rate has been the rampant housing market and the fear that rate cuts would pour more petrol on the fire.
However, yesterday, the RBNZ announced another round of loan to value ratio restrictions, which has been interpreted by the market as clearing the way for an all-out assault on the value of the dollar and likely interest rate cut next month, with possibly another to follow.
The actions of the RBNZ have already seen some easing in the value of the Kiwi dollar, which will have brought some, albeit slight, relief to farmers. When adjusted for currency movements the latest average WMP price in Kiwi dollar terms is actually 3.25% higher than at the last auction two weeks ago, with the Kiwi having slipped from about US72c to US70.3c during that period.
However, as some indication of how much marking of time has been done by global dairy prices so far this year, the GDT Index is down 5.1% since the last auction of 2015, while the WMP average price is, in US dollar terms, down 5.9%.
Commenting on last night's auction results, AgriHQ dairy analyst Susan Kilsby said global milk supply may slow down a little quicker than previously anticipated as the European Commission has agreed to provide more than €1 billion in additional aid for its farmers. Yesterday the Commission announced a €150 million aid package specifically to provide an incentive to reduce milk production. It also plans to prolong its intervention and private storage aid programmes for SMP.
“The additional aid granted by the EU will help to slow growth in milk production – a trend that has already started to occur, while the intervention programme will help soak up any extra SMP that is produced. This will be beneficial to the market in the short-term as it will allow global supply and demand to rebalance more quickly.
"...But continuing to support inefficient farms means we are likely to be faced with over supply situations again in the future”.
There has been a sharp drop in the REINZ's Dairy Farm Price Index, which was down 9.1% in the three months to June compared to the three months to May.
That means it is now down 18.1% compared to the same period last year.
The median sales price per hectare for dairy farms was $32,615 in the three months to June, compared to $33,507 in the three months to May and $35,531 in the three months to June last year.
The Index adjusts for differences in farm size and location, while the median price per hectare does not.
The number of dairy farm sales has also declined significantly, with 46 sales in the three months to June compared to 60 in the three months to May and 64 in the three months to June last year.
However, sales of other types of farming properties have held up reasonably well, with 472 farms of all types selling the three months to June compared to 489 in the three months to May and 479 in the three months to June last year.
The REINZ All Farm Price Index was down 4.3% compared to the same period last year.
"Sales volumes for the three months ending June 2016 reflect a reasonably stable rural market with finishing, grazing, arable and horticultural categories maintaining the status quo," REINZ rural spokesman Brian Peacocke said.
"Dairy farm volumes, however, have eased 23% from the previous period."
Grazing properties were the most popular, accounting for 36% of sales in the three months to June, followed by finishing properties 23%, horticulture properties 16% and dairy properties 10%.
The lifestyle block market remains buoyant, with 2480 lifestyle properties selling in the three months to June which was down slightly from the 2518 sold in the three months to May but still up 19% compared to the three months to June last year.
The median price of lifestyle properties has risen by $30,000 in the last month and is now at a record high of $580,000.
In the year to June, 8967 lifestyle properties have been sold with a record collective value of $6.67 billion.
"The lifestyle market is very similar to the residential market with strong demand across the country with the greatest limitation being the availability of properties for sale," Peacocke said.
"Indications form around the country suggest the current robust market is likely to continue for some months yet."
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By Keith Woodford*
I have previously written how New Zealand’s seasonal dairy industry aligns nicely with long life commodity production but does not align well most value-add products. In contrast to New Zealand, in nearly everywhere else in the world – apart from Ireland, and some areas in Australia – the cows are milked for 12 months per year. This is driven by the needs of consumer markets. So if New Zealand wants to capture an increasing share of the branded markets, it will need to figure out how to make non-seasonal production systems work in our pasture-based environment.
It definitely won’t be a case of everyone moving to non-seasonal production, because there will always be a place for long-life commodities. But we do have to give serious thought as to how we can diversify away from such high reliance on whole milk powder (WMP). This WMP is essentially a product that is consumed in developing rather than developed countries. Currently, China is by far the dominant WMP consumer, and also now the largest WMP producer, but in time they are likely to move away from WMP to more consumer-focused products.
Producing milk in winter does cost more than producing milk in the warmer months when grass is doing its ‘growing thing’. So it has to be the processing and marketing companies that provide the lead and tell farmers what premiums there will be for out-of-season production.
Currently, there are some premiums for production outside the peak season but the pricing messages are complex, often short term, poorly communicated, and insufficient to get a response by mainstream farmers.
Fonterra already offers premiums to all farmers for any milk produced outside the four peak months of September to December. Both last year and this year, that premium has been and is 51c per kg milksolids. As a consequence, and using Fonterra’s current overall guidance for 2016/17 of $4.25 per kg milksolids, by the end-of-season financial wash-up they plan to have paid $4.01 for milk produced September to December, and $4.52 for milk outside these months.
Fonterra calculates the 51c off-season premium (or peak-season discount if viewed from the mirror-image perspective) by allocating to the peak months of September to December all of the cost of servicing capital invested in stainless steel and associated processing equipment. This is based on an assumption that there is surplus capacity at all other months. To those trained in economics, this makes sense. However, this seasonal premium / discount does not make allowance for the inventory costs of holding product over a 12-month cycle. And it is calculated only on the assumption that any additional facilities will be bulk standard WMP dryers. That last assumption does make sense if New Zealand is to remain wedded to long-life commodities, but bigger premiums will be needed to fill the value-add factories for 12 months of the year.
Throughout the country, there is a range of premiums emerging for specific situations. For example, famers in South Canterbury can earn an additional $1.40 per kg milksolids over a 45-day period in June-July for milk destined for the mozzarella factory at Clandeboye, and Westland will be offering $1.91 for a 100-day period next winter for those of its Canterbury farmers who can service their UHT factory at Rolleston. Also, Fonterra has a range of contracts for farmers supplying ‘town milk’ over the winter period, although Fonterra is currently squeezing back on the prices of these contracts.
These and other premiums can be seen as a first step, but they will need to become much more widespread if we are to move further down the value-add path.
Once premiums become explicit and come with long term contracts, then farmers can make their own decisions as to whether it is worthwhile moving to non-seasonal production, given that there are both costs and benefits.
Perhaps the first myth to shed is that spring calving is what comes naturally to cattle. The truth is that cattle, unlike sheep and deer, are happy to breed at all times of the year, and if left to nature, will calve at greater than 12-month intervals. It is only us humans that try and squeeze them into a 12-month cycle. The consequence is that despite hormone-related reproductive techniques to induce early ovulation after calving, there are high culling rates of cows that do not keep to the strict 12-month breeding cycle. Indeed, the major cause of culling in New Zealand is failure of cows to keep to the 12-month cycle. This challenge to maintain 12-month calving has increased since pre-term calf inductions have been banned.
There is another myth in New Zealand that the attractive-looking high-powered ryegrass-dominant pastures that we feed our dairy cattle are the natural feed for cattle. One only has to observe the runny green liquid coming out from the rear end, and compare this with beef cattle on the hills, to realise that high-octane largely single-species ryegrass pastures are an unbalanced feed.
In most parts of New Zealand, non-seasonal production means that cows need to be off-paddock in the winter. But there is increasing realisation that we need to go down that pathway even for dry cattle if we are to manage the nitrogen leaching problem.
There is a range of ways that off-paddock wintering can be achieved. In some cases, it may be by stand-off pads, but unless there is a soft surface for cows to lie on, this raises welfare issues for anything more than about a three-day period.
Lincoln University is currently trialling a range of open-air feed-pad surfaces, together with a dung and urine collection system, at their new Ashley Dene dairy farm. This includes use of matting surfaces. This may work in some Canterbury winters, like the current one which so far has been warm and with modest rain, but in most parts of the country a roof will be required.
The overall wintering system that can satisfy both welfare requirements and the need to minimise winter leaching of nitrogen is the free-stall barn where cows choose their individual padded cow-bed which is raised such that most of the dung and urine falls out the back of the bed into a laneway. These are the systems used widely in Europe and the USA, where they have been refined by 50 years of experience. So far in New Zealand, there are about 40 of these cow houses that are operational.
New Zealand farmers are doing their own experimentation as to how to make these barns work in the New Zealand environment. Some are feeding the cows in the barn, others are taking the cows outside for a period of daily grazing and then returning them to the barn. Some farmers are using the barns throughout the year, in some cases using robot milkers, while others are only using the barns in winter. Some are already using the barns in association with non-seasonal calving, while others are sticking with spring calving given a lack of pricing signal in their region to do otherwise.
The big issue that frightens off most farmers is the capital cost, typically between $6 and $10 per kg of milksolids produced on the farm. However, there are lots of compensating factors.
To start with, most farmers, even with seasonal calving, find that they can get increased lactation lengths by milking later in the season. For those that go non-seasonal, the average cow-lactation length goes up by more than 50 days. American research and practical experience has shown that well fed barn cows can be milked to within 45 days of the next calving, without any downside. Also, winter feed requirements are substantially reduced for cows in a wintering barn. And summer heat stress is also greatly reduced for cows that can access the barn in the heat of the day. And then there are the benefits from less winter pugging of pastures. Most of the barn farmers whom I have contact with have increased both their per cow production – often by more than 100kg milksolids – and also their per hectare production, through a combination of some or all of the above.
In New Zealand, we still have lots to learn about how to optimise non-seasonal dairy systems in our pasture-based environment. We have lots to learn about the best use of crops within these systems, and we have lots to learn about controlling the cost of production. From what I am seeing, there is a huge range in performance on these farms, just as there is on seasonal pasture-only farms. But there will be more than one path forward.
When I look ahead 20 years, and regardless of farming system, I see much stricter rules about winter leaching of nitrogen. Wintering barns, nutrient management, and non-seasonal milking to help cover the costs thereof, could all go together as a package.
To many farmers, all of the above will be many steps too far. The existing paradigms about so-called low-cost milk production from pasture are deeply embedded in the psyche. And in any case, most farmers do not have the capital to make such changes right now. But the notion that in 20 years we can be doing the same things as now is scarcely tenable from either a financial or environmental perspective.
So it will be a long journey, but all journeys have to start somewhere.
Disclosure of interest: Keith Woodford consults to Calder Stewart, whose business interests include the construction of free-stall barns.
Keith Woodford is Professor of Agri-Food Systems (Honorary) at Lincoln University and a Senior Fellow (Honorary) of the NZ Contemporary China Research Centre. His archived writings are at http://keithwoodford.wordpress.com
Another week of stable schedules reflects the market uncertainty brought about by Brexit and the following currency rises against the kiwi dollar, and prospects look flat for the early season.
Scanning results in many areas of the North Island are back 15-30% due to the severe autumn facial eczema outbreak, but early results from southern flocks look to be well above average.
Some early lambs are now being seen in both islands but are arriving onto an uncertain market that while supply is short has failed to ignite any demand or price lifts.
A shortage of stock has driven demand for 7100 in lamb ewes sold at Temuka last week, with young fertile sheep reaching $182, and even annual draft ewes made over $150 per head which seems ahead of present market prospects.
Lack of numbers has kept store and prime lamb prices lifting at the saleyards and ahead of last year, but most sheep farmers are still struggling for profitability at these levels.
The first South Island wool sale of the season produced another disappointing result and only 61% of the offering was sold.
Buyers targeted only the best wools for immediate orders only, as higher than required Chinese stocks and global financial insecurity, dampened demand.
Indicator prices did however lift from last week’s North Island sale, with coarse crossbred wools rising over $5 again, but mid micron fibres dropping again to a new yearly low of 817c/kg.
Some farmers report they have received 50c/kg less for wool between recent sales and these latest falls will add to the falling profits from the sheep sector.
The poor financial plight of Wool Equities has been publicised this week and it appears their ambitious plans for growth have come unstuck and wool growers funds have all but disappeared.
More flat beef schedules this week, as US cattle futures plummeted to a five year low, and increased global competition for NZ beef suggests this sectors recent high returns maybe about to ease.
Early prices for dairy bull weaners are still reflecting last year’s markets, but buyers should be cautious as already export schedules for both prime and bull values are 30c/kg behind last year.
Few store animals are being traded in the south and while there is more activity in northern saleyards due to good winter pasture growth, interest seems to be more focused on younger animals.
South Island prime steers sold at the saleyards are still rising in price on the back of the lack of quality animals being offered, but in the north prices have been stable for the last two months.
Another small lift for venison schedules this week, but concerns about the currency remain, as the Euro is now 6-8% stronger against the Kiwi than it was last July.
Venison finishers in the south have been enjoying the dry mild winter, and should reach or exceed spring liveweight targets for the chilled market.