Rural

  • The Sheep Deer and Cattle Report: A poor result from Silver Fern Farms illustrates the struggles for the red meat sector

    LAMB

    Schedules were stable this week, but sheep farmers’ confidence is low, as more of the same is just not good enough for most in the sector.

    Early Easter production will start next week and it is hoped this strong demand period will kick start better price levels.

    In our main lamb markets of the UK and Europe demand remains strong but the currency is thwarting these returns reaching the farmers’ pocket. The Prime Minister’s visit to Britain to negotiate trade deals post Brexit looks very important. 

    The two-tooth sales in the north have started and while the top prices look good at $170-$175. Most animals are still only reaching prices in the low $100’s.

    Mixed aged sheep are averaging about $100 at the saleyards which is at similar rates to last year but there are few signs that the falling sheep numbers is at an end

    Demand for store lambs remains strong at around $70-$75 for well-bred stock and numbers offered in Canterbury are lifting, as the weather gets dry and more foothills properties are weaning.

    A significant premium is being held for lambs in the south as feed  and expensive cattle options drives the market and some believe some southern buyers will start bidding at North Island yards soon.

    Sheep and Beef farmers confidence levels would have taken another hit on the Silver Fern Farms annual loss for the past year. Some will argue this result shows how important the new partnership deal is for the future of the red meat sector, but only a positive annual result in the coming year will quieten the doubters.

    WOOL
    The first sale of 2017 saw big volumes hit the market and prices fell as a result, with crossbred indicators reaching new lows at 380c-393c/kg clean.

    There was a lift for lambs’ wool however, but it was micron dependent and the finer the better for crossbred lambs, to receive a better price.

    Industry sources suggest volumes of wool stored is now growing after weeks of passings at auction and this will delay any quick upturn in this market short of Chinese interest (where sales are back 37% on last year).

     

    BEEF
    Stable schedules this week for beef, as volumes of prime animals continue to be in short supply. Although nationally, reports suggest bull numbers have picked up significantly.

    Saleyards have been full of used sire bulls after they have done the job in the dairy herd, but cull dairy cow numbers are light after two years of heavy culling.

    Saleyard prime steers have maintained their price levels over the Xmas break with Canterbury saleyards still 30c/kg lwt ahead of northern venues, for similar weight animals.

    The WTO has ruled in favour of NZ over the Indonesian ban on our beef to that country, as trade negotiators strive to get a fairer deal for all of our agricultural products in the global market.

    DEER
    Venison has maintained the improved summer schedules this week and instilled further confidence amongst deer farmers for the future ahead.

    No progress in the velvet standoff but industry officials are confident the regulatory changes made by the Chinese will be good for NZ velvet once they work through the system.

  • Keith Woodford says messy water laws impede efficient use of our key resource. It is a resource that has the potential to make us "an extremely wealthy society"

    By Keith Woodford*

    Current controversies about exporting water, be that in bottles or in bulk tankers, draw attention to New Zealand’s key resource. Yes, that resource is indeed water. In a world that is chronically short of water, we in New Zealand are greatly blessed.

    It is because we are so blessed that until recently we have taken the presence of water for granted. Essentially it has been a free resource.  As a consequence, water law in New Zealand is real messy. And that leads to major impediments to water being used efficiently, and in ways which the different groups in society can agree on as being ‘fair’. 

    Water that falls as rain on private land has de facto use rights. But once that water runs off into a stream, or permeates below the level where plants can extract it, then it belongs to the Crown – in effect the people of New Zealand. 

    Throughout our farming history, the right to abstract water for irrigation has been on a first-in first-served basis, more recently legitimised by formal water abstraction consents. These consents are typically for periods of about 35 years. Throughout the 20th century, obtaining a water right and subsequent renewal thereof was almost automatic. 

    It is only in the last 15 years that there was been widespread recognition that water use rights have been over-allocated in some parts of New Zealand, particularly the Canterbury Plains. Submersible-pump technology now allows water to be lifted from depths of 200 metres and beyond. Those aquifers do recharge via the porous braided rivers draining from the mountains, but abstraction rates have gone well beyond these renewable volumes to create non-sustainable water mining. 

    It is this recognition of non-sustainability that has led to the current development of big storage facilities such as extensions to Lake Coleridge in Mid Canterbury and large down-country storage south of the Rangitata. In the South Island, the rivers peak in early and mid-spring when the mountain snow melts, but the peak irrigation demand is not until late spring and summer.  Hence, the role of storage.

    The cost of water for irrigation includes the costs of storage and the costs of distribution, but not a cost for the water itself. The water itself is a non-priced resource. Nevertheless, the cost of irrigation is very substantial.

    In Canterbury, the newer irrigation schemes typically have annual charges to farmers of about $800 per hectare. This includes the cost of servicing the capital to build the off-farm facilities.  Even where existing pumping costs from aquifers are less than this, such as Stage 1 of the Central Plains scheme, most farmers have been willing to invest in the new storage schemes. This is because they provide a secure long-term source of water for which the ongoing cost has effectively been fixed in nominal terms; i.e. the debt-servicing cost will go down in real inflation-adjusted terms over time.

    The economics of irrigation schemes are always controversial in advance. I recall one Mid Canterbury farm consultant saying to me several years ago that he had never seen a scheme that seemed cheap at the time of investment, but that they had all been worthwhile in retrospect. In part, that has been because the investing farmers figured out better ways to use the water than the economists had assumed in advance.

    Those debates about economics are going to continue over the coming years in relation to future schemes. My own perspective is that, without more irrigation along the east coasts of both the South and North island, we are going to be constrained in terms of the increased wealth that we can draw from our land. And with an economy that depends on agri-food exports, and the need to spread that wealth across a population that is rapidly increasing, driven by immigration, then we need to do some hard thinking.

    That does not mean that we should ignore the environment. Indeed, environmental issues have to be paramount. But the beauty of irrigation is that it does give us a lot of control over nature, and the capacity to manage nutrient issues within a managed system. 

    Late last year I was invited to a workshop which posed the question: ‘what would our agriculture look like if we had been colonised from Asia?’ That ‘source of colonisation’ question stirred some good debate about the impact of our cultural heritage, both in relation to farming systems and market perspectives. Arising from that, I am now part of the steering committee for a ‘future foods’ project.

    Only time will tell where that project leads, but an underlying driver is that irrigation is expensive and struggles to be economic when used to produce commodities. It needs to be used for value-add activities. Along with this, if properly managed, it creates capacity to manage nutrient flows. It also allows us to build soil carbon levels and soil fertility, which are themselves environmental benefits.

    Whether or not our ‘future foods’ project will address the issue of water itself as a consumer product I do not know. It may be outside our remit. But it is certainly something that I often think about.

    When I travel overseas, one of the most important issues for me is obtaining quality drinking water. Even for cleaning my teeth, I prefer the bottled stuff to what comes out of the tap. And so I pay whatever the vendor asks, as long as it is an established brand, preferably imported from a developed country.

    Even here in New Zealand, bottled water sells for at least $1.20 per litre and often up to $5 per litre. The premium brands, even when locally sourced, are more than the price of milk.

    By my calculations, milk produced on an irrigated farm requires about 330 litres of irrigation water per litre of milk (or about 5 million litres per hectare to produce about 15,000 litres of milk).  Rainfall is additional. One can argue over the fine details but the big picture is irrefutable. The potential export returns from bottled water relative to milk from a  given quantity of irrigation water, are huge.

    If we sold one litre of water per day to 10% of the Chinese population at an export value of $1 per litre, then we would be an extremely wealthy society. The annual export income returns would be $55 billion per year.  The amount of water required (55 billion litres) is trivial – about 1% of the water we use on irrigated agriculture.

    The problem in New Zealand is that we do not have the institutional systems in place to capture these benefits, and to share those benefits across the people of New Zealand as the fundamental owners of that resource. Instead, we get into debates about whether individual groups are exploiting our fundamental birth-rights.

    If I could wave a magic want to move things forward, it would be a legislative system where the Government could sell pristine drinking water at a good healthy price from designated sources on behalf of all New Zealanders. Private firms could tender for the abstraction right, with the minimum price set by Government. I would legislate that all such water could only be exported from New Zealand in consumer-ready form – none of this export in bulk tankers, as one group is currently proposing.

    I have no specific view on the best source thereof, but pumping from deep water aquifers at say 200 metres has lots of appeal. The soil that the water has passed through on its journey to ‘deep down under’ acts as a marvellous filter of any bugs, and the water is even more pristine than from mountain streams. Why can it not happen?


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

  • Allan Barber shows there is no easy route to higher levels of farm profitability as the dark outlook for EU and UK farmers shows. NZ farmers will find it hard to duck global trends

    By Allan Barber*

    When sheep and beef farmers in New Zealand grumpily ponder their forecast returns for 2016-17, they may be able to take some comfort from the precarious state of farmers in Europe, particularly the UK where they are facing even more uncertainty of income.

    Private Eye’s Bio-Waste Spreader column contrasts the rhetoric of the Environment Minister saying farm subsidies must be abolished post Brexit with a report by her own Ministry, Defra, which finds British farmers would be unable to keep going without them. In the 2014/15 year dairy farms were the most profitable averaging GB Pounds 12,700, whereas cropping farms made GBP 100, lowland livestock farms (most like our sheep and beef) lost GBP 10,900 and grain growers did even worse. These profits or losses came before farmers paid themselves any wages or drawings.

    The only thing keeping them afloat is the average EU subsidy of GBP 25,000 which Andrea Leadsom, Environment Secretary, would like to get rid of. Apparently one solution suggested by Farms Minister George Eustace would be to pay something that looks remarkably like the Single Farm Payment which applies across the EU and which anti EU Tories like Leadsom and Eustace have been rubbishing for years.

    Subsidies make up an average of 25% of farm revenue across the EU, while in Norway and Switzerland farmers receive government assistance of more than twice that amount. In Canada farmers receive almost 20% of their revenue from subsidies and even in the United States they make up 10%. In contrast it appears New Zealand farmers going cold turkey over 30 years ago have done something all other agricultural producing nations have found impossible.

    This may be cold comfort for sheep and beef farmers tired of seeing their profits decline year on year, but the fact remains they have been profitable every year, even marginally in 2007/8 which was at a 50 year low. Conversely in 2011/12 average farm profit was $131,100, similar to 2001/2, but 10 years between such highs is clearly unsatisfactory. This sort of trend produces land use changes, as landowners try to find the option producing the best returns. But there don’t seem to be any clues in the rest of the world about how to avoid the commodity trap and achieve consistently high returns.

    A London based market intelligence firm Euromonitor International reports global meat consumption rose 2% in 2015 because of increased consumption in emerging markets, but the main area of growth was in chicken and pork with the Middle East and Africa and Asia Pacific being the only regions to post an increase in beef and veal consumption. Consumption in North America declined 3.1% and in Latin America by 3.7%. All meat consumption in Western Europe declined with beef and veal coming down by 1%, while in the USA pork rose by 8% and chicken by 5% as consumers chased leaner meats driven by dietary concerns.

    It is difficult to fathom how New Zealand agricultural producers in general, and more specifically red meat producers, will be able to buck global trends which are driven by many factors including regional population growth, health and diet, growth of convenience foods, relative economic prosperity and future technological developments in protein production. As an exporting country New Zealand needs to be acutely aware of what global consumers actually want their food to deliver, how this is changing and how quickly.

    What is certain is the increasing importance of maintaining or improving our environmental performance as a means of underpinning our brand reputation. Food provenance has become a critical success factor, particularly in traditional developed markets. It is no longer enough to rely on New Zealand’s slightly ragged claim to be 100% pure, but we must actually demonstrate the truth of such a claim and build a brand story around it. In a world which may be retreating from the removal of trade barriers, it will be essential to improve our reputation for product quality at every stage of the value chain.

    With all due respect to the dairy industry’s efforts to introduce stringent environmental standards, it doesn’t appear to be winning the PR battle with some commentators increasingly gaining air time to criticise water quality. This battle must be won, if New Zealand is to build a brand story based on quality of production, environmental performance and provenance.

    In a world where synthetic proteins will be able to simulate the taste and texture of meat, it won’t be enough to supply undifferentiated beef and lamb and expect to receive a premium price for it. In order to satisfy the demands of the wealthiest 1% of the world’s population, it will be essential to provide a differentiated food experience targeted at the precise needs of particular market segments.

    However these markets must be carefully developed before farmers can expect to be rewarded with a premium for what they produce, unless they meet a tightly defined specification for a product which can be marketed directly to an end consumer who is willing to pay more than usual for it.

    As is evident from the incomes earned by UK farmers before subsidies, there is no easy route to higher levels of profitability.


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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 was first published in Farmers Weekly. It is here with permission.

  • The Weekly Dairy Report: Dry in the North, but most areas report satisfactory feed levels as summer proper starts

    While frustrating for holiday makers, the recent weather has been good for grass growth and most areas of the country have plentiful feed supplies, with Northland being a notable exception.

    Drought has returned to the far north and many cows are being milked on supplements after some reports the region is at its driest for 10 years.

    Pastures appear less dominant in clover than in previous years as a result of less sun, but winter crop establishment looks strong in the south and ground cover for brassicas  has now been achieved.

    The Opuha Dam in South Canterbury is full again after bigger inflows and lighter spring irrigation demand, and the company is confident plenty of water will be available for the rest of the season.

    As yet no reports of any velvet leaf sightings in fodder beet crops nationally, but managers are urged to be vigilant in checking for this invasive weed.

    The saleyards are now filling with unmated cows and dry heifers as farmers look to only keep and feed producing animals.

    Two milk auctions since the last report and unfortunately both have headed downwards as the market took a breather from the recent upsurge.

    Whole milk powder prices were affected the worst by this adjustment, and in the last auction prices fell 7.7% in a market short of bidders.

    Bank analysts are still comfortable with the present price levels and are confident the yearly $6 forecast is still achievable, but this fall will reinforce the need for managers to reduce costs in their operations.

    Once again the ASB has led the optimism race suggesting $6.50/kg ms could be achieved this season  and followed up with a $6.75 prediction for next year on the back of falling global milk flows.

    Dairy farm real estate has started moving again with agents heralding a record payment of $55,500/ha for a Bay of Plenty farm, but in reality the banks have tightened the lending rates as they look to reduce their exposure to this sector.

    The MPI have brought more charges against a man who works for the pet processing company Down Cow for more bobby calf abuse as the sector is reminded that animal rights is now a very sensitive issue with the public.

    The sectors environmental reputation is under constant scrutiny and the loss in court by Dairy NZ on the complaint of the Greenpeace ad was misleading and incorrect, was a blow to the industry.

    Better ways of selling the dairy industrys responsibility of caring for the land will be needed, or the regulatory rules will become too tough and expensive for many farmers.

     

  • The Sheep Deer and Cattle Report: Standoff continues with velvet but summer venison prices very strong

    DEER
    Venison schedules remain strong over the summer period with schedules about $50/head better than the same stage last year.

    However with herd rebuilding started, processors are struggling to maintain supply to existing customers.

    The velvet standoff continues, with buyers awaiting the tariff cuts of Jan 1st and with the Chinese audit proving slow to approve regulatory changes the market appears stalled.

    Last years A grade average of $125/kg appears at present unlikely to be achieved, although marketers report demand continues to grow and the supply increase is manageable.

    Sire stag sales are now occurring as farmers look to invest in both velvet and venison genes to improve the performance of their herds.

    LAMB

    Processing demand has lifted, but feed conditions aligned with the poor present returns have farmers chasing heavier weights.

    Things are drying out in the north and east of the North Island and some areas of the South Island but most areas have plenty of feed to start the summer.

    Prices have remained steady over the Xmas break, and are now at a similar level to where they were last year, but with the currency much stronger in a market where product demand is firm in all destinations, farm gate returns are still disappointing.

    Reports suggest stud ram sales have been soft with meat breeds popular, but maternal sires harder to shift.

    Alliance’s chairman predicts more plant closures as the “shift from sheep” continues, but some hope could arrive for an ovine revival with a PGP partnership starting its sheep milking program with Spring Sheep Milk and MPI as the investors.

    Autumn mutton contracts are now being offered at $2.80-$2.90/kg cwt and present returns for cull ewes are at a yearly high.

    Feed is driving the store lamb market with average sales about $10/hd greater than last year even though the schedule is similar and with lambs wool prices weak margins in trading will be tight.

    Surplus store ewes are selling for around a $100 per head, and with cattle prices remaining high and feed supplies strong, demand could increase for quality animals.

    WOOL
    The last sale of 2016 in the North, saw the market recover slightly at the new lows, but at around $4/kg clean for crossbred wool no one is happy.

    Lambs wool sales have also started in a disappointing manner at 414c/kg clean, which is over $2/kg behind last year, and for some this will make the practice of shearing lambs questionable.

    A large combined Island sale with 22,000 bales of wool rostered this week will test the market, especially as the quality of product offered will now be showing signs of the wet damp weather and plentiful feed.

    BEEF
    Feed conditions have kept processing supplies in the South behind the norm as farmers look to put more weight on their animals and hope that oncoming dry conditions will lower the cost of replacement animals.

    Schedules for prime animals have remained steady helped by a shortage of supply, but bull prices have been easing back reflecting weaker demand out of the US.

    In the US, the market has fallen further for manufacturing contracts and the domestic market has been receiving bigger volumes than last year, adding further pressure to weak prices.

    Saleyard prime steers in the South finished the year strongly with prices close to the spring yearly highs, but with few available replacements and those expensive, profits may not be as strong as they appear.

    Store animals are still attracting unprecedented demand for this time of year as many livestock farmers look to make something extra with the surplus feed.

  • Despite the speed of rising dairy prices in 2016, Rabobank sees more to come as supply is constrained in many countries. But affordability may also become an issue for consumers

    Content supplied by Rabobank

    Reduced milk supply out of key dairy export regions – including New Zealand – will fuel further dairy price increases in the early part of 2017, according to Rabobank’s latest global dairy outlook.

    In its recently-released Dairy Quarterly report, Rabobank says dairy production in the second half of 2016 dropped significantly in six of the seven key dairy export regions with 2.6 million tonnes less milk produced compared to the second half of 2015.

    Report co-author Rabobank dairy analyst Emma Higgins says of the key dairy export regions, the US is the only region to buck the trend of falling production.

    “Strengthening producer margins have driven a lift in US production which was up 2.5 per cent in October from the same period in 2015,” Ms Higgins says.

    At the same time as declining global milk production, Ms Higgins says dairy demand in the US and Europe has strengthened, enabling stock growth to grind to a halt – and global dairy prices have “rocketed upwards” as a result.

    And the recent rally in global dairy prices has further upside to come, she says, as efforts to increase global production take time.

    “Reduced cow numbers and challenging production conditions mean we expect the recovery of global dairy production and volumes for export will be delayed until the second half of 2017 – and this will create further upward price pressure in the short term,” she says.

    These challenging production conditions are particularly evident in New Zealand, Ms Higgins says, with disruptive weather at the beginning of the season severely hammering spring pasture growth in the North Island, setting the scene for the rest of the season.

    “The South Island has fared better, however, and we are still picking milk production for the full season to be down between five and seven per cent,” she says.

    While prices have improved across the board, Ms Higgins says the recovery will remain “bumpy”, as prices across the dairy complex become increasingly divergent.

    Results from the most recent Global Dairy Trade auction – where the index declined 3.9 per cent – provided confirmation of this bumpy road with many buyers absent from the market due to the holiday season.

    “Whole milk powder has posted the strongest recovery in recent months, with prices increasing by more than 45 per cent in the last six months of 2016, while consumer and food-service demand for butter is behind much of the upswing in in dairy fat pricing,” she says.

    “In contrast, surplus protein stocks in the form of skim milk powder continue to weigh on the market, which has limited its upside.”

    Increases in Fonterra’s forecast farmgate milk price for the 2016/17 season will have pushed many farmers back into the black, Ms Higgins says, but the current season’s theme is likely to be one of recovery.

    “Given the speed at which dairy prices have increased since mid-2016, we see further upside to Fonterra’s 2016/17 farmgate milk price, but, despite this, the focus for most will be on recovering the ground lost over the last two seasons,” she says.

    What to watch in the first half of 2017

    The report identifies five key factors to watch in early 2017 that have the potential to impact dairy markets: currency moves, affordability, Chinese buying, Dutch environmental emissions and Californian regulations. “How developments unfold in relation to these areas will influence the direction of global dairy markets in the first half of 2017,” Ms Higgins says.

    Ms Higgins says with the continued strengthening of the US economy, US interest rates are expected to continue to rise resulting in a stronger US dollar. “This will provide headwinds for US exporters and, at the same time, act as a limiting factor on the level of price rises in US dollar-denominated markets,” she says.

    A stronger US dollar would also reduce the affordability of dairy products in emerging markets and test demand threshold, she says.

    And this “affordability” issue is likely to counter some of the upward price pressure as the price rally continues to develop.

    Developments in dairy industry environmental regulations in The Netherlands are also a key factor to keep an eye on, Ms Higgins says.

    “The Dutch industry is wrestling with the issue of how to operate within the limited levels of phosphates and nitrates which can be applied to soils under European environmental regulation – and complying with these regulations is likely to require a significant reduction in their cow numbers,” she says.

  • Keith Woodford says that Bellamys infant formula woes has lessons both for New Zealand 's organic dairy farmers and the broader New Zealand infant formula trade with China

    By Keith Woodford*

    For the last two years, Bellamy’s organic infant formula out of Australia has been one of the two rising stars of the Chinese infant formula market. The other has been ‘a2 Platinum’ produced here in New Zealand by Synlait for The a2 Milk Company (ATM). 

    In recent weeks, the Bellamy’s business has run badly off the tracks. This has sent jitters more widely through the infant formula industry.

    First, there was a cautious market guidance release by Bellamy’s on 2 December, and the Bellamy’s share price immediately crashed 40%. Then on 12 December, Bellamy’s asked that its shares be suspended from trade for 48 hours while they assessed their position. This suspension has subsequently been renewed twice and currently runs through to 13 January 2017 while further assessment occurs.

    It is now apparent that Bellamy’s had been losing market share for some months, but things really went awry during the second half of November. Bellamy’s has blamed regulatory disruption and competitive price-cutting in China for their problems.

    The market-fear contagion spread rapidly to ATM investors, and ATM shares suffered a reactive decline in early December approaching 20%. However, ATM has assured its shareholders that its ‘a2 Platinum’ sales continue to grow strongly and that all is well.  Increasingly, it is looking as if many of the problems are indeed specific to Bellamy’s and perhaps some other companies to a lesser extent, but that there continue to be winners as well as losers. The challenge is to identify who fits into each category.

    There are three key reasons why Bellamy’s misfortunes are relevant to the New Zealand dairy industry. The first is that it demonstrates yet again that value-add dairy is not an easy game. Strategies can quickly come apart at the seams without all of three key elements: a sustainable point of difference, strong marketing   and coherent logistics. Even apparently successful fast-growing businesses can get the speed wobbles.

    The second reason is that although Bellamy’s is Australia-based, it has important contractual arrangement with New Zealand-based Fonterra. Specifically, Fonterra has contracted with Bellamy’s to be a key long-term processing partner at Fonterra’s Darnum Park facility in Victoria.  Those arrangements are now looking in jeopardy.

    Third, Fonterra’s new-found enthusiasm for organic milk here in New Zealand has in all likelihood been built on assumptions that the Bellamy’s business will continue to thrive.  Without Bellamy’s and its China market for organic infant formula, the international demand for New Zealand sourced organic milk powder looks shaky.

    Obtaining information on market shares for infant formula in China is fraught with difficulties. This is because there are multiple channels.  There are Chinese supermarket channels which are in major decline. There are ‘mother and baby’ stores, which have become increasingly important as ‘bricks and mortar’ outlets.   And at the top-end of the market, online sales are the most important of all. 

    Online sales include both formal and informal imports. The formal channel is regulated by China Customs and shows up in Chinese statistics. The informal channel, also known as the ‘grey trade’, does not show up in these Chinese statistics.

    This grey trade is managed by overseas Chinese who buy product either wholesale or retail in overseas countries, and then ship it to customers back in China in packs of up to 10 tins. These packages are able to pass through with minimal formal documentation. The expatriate Chinese buyers who manage the trade are known as daigou, literally ‘buyers on behalf of’.

    Describing the daigou business as ‘grey trade’ can lead to false assumptions. For example, the Chinese authorities know precisely what is happening and they are happy to let it proceed, at least in the meantime. It provides competition in the market place and stops price gouging by the registered importers.

    This daigou activity is a major reason why infant formula prices in China have been reducing rapidly over the last 18 months, which is precisely what the Chinese Government has been wanting to achieve. Prior to that, the mark-ups in China were outrageous.

    For both Bellamy’s and ATM, the daigou trade has been fundamental to their growth. For a while, part of this trade was functioning from New Zealand, but that has largely ceased. This is because New Zealand now allows only registered exporters to send infant formula overseas. Accordingly, the trade from ‘down under’ now focuses on sourcing from Australia.  In this regard, Australia also presents better opportunities because there is no GST on infant formula.

    In the last three years, supermarket and pharmacy sales of infant formula in Australia have trebled. Now, we know that Australian women are not suddenly having a lot more babies, and we also know that there has been no sudden move away from breast-feeding. The explanation is that all of this extra infant formula is going to China.

    By early 2016, Bellamy’s had achieved a 21.6% market share in Australia (Aztec supermarket and pharmacy commercial data), up from about 10% market share when the company went public in July 2014.  Based on an Australian market that had trebled in size - on account of daigou purchases – together with additional sales to China through the formal system, the overall Bellamy’s growth had been about six-fold. The shares that were offered for AUD $1 back in August 2014 rose to over $15 at the end of 2015. The market capitalisation of the company exceeded AUD $1.5 billion.

    From March to November 2016, the shares bounced around between $15 and $10, but the market remained largely unaware that Bellamy’s was losing market share in Australia – dropping to 14.9% by November from 21.6% in March, according to the Aztec data. Bellamy’s gave no indication at its AGM in late October of anything that was astray and the shares rallied above $12.

    However, it is now acknowledged by Bellamy’s that their own China online store was discounting products in early November. This included ‘Singles Day’ (11/11; i.e. 11 November), which has come to be a massive day for China purchases for all retail products. It would therefore seem that, at least by early November, Bellamy’s knew it had excess inventory.

    This suddenly left the daigou who were purchasing at non-discounted prices in Australia at a competitive disadvantage. In mid-November, they shifted their allegiance to other brands. Accordingly, it would seem that Bellamy’s, by not properly factoring in the importance of the daigou, shot themselves in the foot.

    When the share market began to recognise what was happening, the response was fierce. CEO Laura McBain gave a telephone conference to analysts, but that simply raised more questions. The answers McBain provided were fluffy answers such as that she was ’happy’ with the overall situation. Subsequently, there were also many negative online investor comments about the Chair and CEO of Bellamy’s having made substantial sales of their own shareholdings as recently as August. Did the Chair and Manager know something that the market did not know? 

    The subsequent and ongoing suspension of the shares is extraordinary. Until there is clarification from the company as to the extent of the pickle they are in, then any judgement as to ‘where to from here’ can only be speculative.  

    On perusing the original prospectus issued by Bellamy’s in 2014, I note that Bellamy’s put great weight on the fact that their products were 100% Australian-made and 100% organic-certified. This was their point of differentiation. What was never stated was that all the organic milk powder ingredients were imported, much of it from Europe and most likely since then also from New Zealand. So yes, the product was Australian made but the key ingredient was not! And there lies an Achilles heel of a non-transparent supply chain to go alongside the bullet-wounded foot.

    It seems that the greatest short term beneficiary of Bellamy’s has been ATM with its ‘a2 Platinum’. Between March and November, while the Bellamy’s ‘Australia plus daigou’ market share was sliding, the ‘a2 Platinum’ market share in the same market rose from 15.7% to 24.8%. A somewhat enigmatic announcement from ATM CEO Geoff Babidge just prior to Xmas, that ATM continued to experience strong ongoing growth since its November AGM and was not experiencing regulatory barriers, would suggest that the ATM market share may well be heading even further north.  

    Although I did not foresee the magnitude of Bellamy’s problems, I am not at all surprised that they have stuck difficulties. Some months back, I wrote that New Zealand organic dairy farmers should be watching Bellamy’s closely, because their New Zealand organic farming future was in all likelihood dependent on ongoing success at Bellamy’s.

    In private communications with prospective organic dairy farmers, I went further with advice that they should be cautious of becoming reliant on major ongoing price premiums. And lying behind that was my own knowledge that Bellamy’s was reliant on non-transparent supply chains for imported organic powders of which the broader consumer market seemed unaware.

    I have also written regularly that there will continue to be big winners and big losers in infant formula. In China, the important products are not only the Stage 1 and Stage 2 products that dominate in domestic New Zealand and Australian markets, but also Stage 3 products for one to three-year olds. Indeed Stage 3 is a considerably bigger market than the combined Stage 1 and 2.  

    Linked to this, the New Zealand industry has not recognised that imported infant and toddler formula is now much more important in China than imported whole milk powder (WMP). The Europeans dominate the former which is experiencing rapid growth. In contrast, New Zealand dominates WMP imports for which the numbers bounce around but with minimal overall growth in the last four years.

    The broader challenge now in New Zealand is that many of the stable doors have been left open and swinging for a long time. It is very hard to regroup once the horses have bolted and galloped over the horizon. 


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

  • With corporate funding of research, “there’s no scientist who comes out of this unscathed." Is science's collaboration with industry a Faustian bargain?

    By Danny Hakim*

    The bee findings were not what Syngenta expected to hear.

    The pesticide giant had commissioned James Cresswell, an expert in flowers and bees at the University of Exeter in England, to study why many of the world’s bee colonies were dying. Companies like Syngenta have long blamed a tiny bug called a varroa mite, rather than their own pesticides, for the bee decline.

    Dr. Cresswell has also been skeptical of concerns raised about those pesticides, and even the extent of bee deaths. But his initial research in 2012 undercut concerns about varroa mites as well. So the company, based in Switzerland, began pressing him to consider new data and a different approach.

    Looking back at his interactions with the company, Dr. Cresswell said in a recent interview that “Syngenta clearly has got an agenda.” In an email, he summed up that agenda: “It’s the varroa, stupid.”

    For Dr. Cresswell, 54, the foray into corporate-backed research threw him into personal crisis. Some of his colleagues ostracized him. He found his principles tested. Even his wife and children had their doubts.

    “They couldn’t believe I took the money,” he said of his family. “They imagined there was going to be an awful lot of pressure and thought I sold out.”

    The corporate use of academia has been documented in fields like soft drinks and pharmaceuticals. But it is rare for an academic to provide an insider’s view of the relationships being forged with corporations, and the expectations that accompany them.

    A review of Syngenta’s strategy shows that Dr. Cresswell’s experience fits in with practices used by American competitors like Monsanto and across the agrochemical industry. Scientists deliver outcomes favorable to companies, while university research departments court corporate support. Universities and regulators sacrifice full autonomy by signing confidentiality agreements. And academics sometimes double as paid consultants.

    In Britain, Syngenta has built a network of academics and regulators, even recruiting the leading government scientist on the bee issue. In the United States, Syngenta pays academics like James W. Simpkins of West Virginia University, whose work has helped validate the safety of its products. Not only has Dr. Simpkins’s research been funded by Syngenta, he is also a $250-an-hour consultant for the company. And he teamed up with a Syngenta executive in a consulting venture, emails obtained by The New York Times show.

    Dr. Simpkins did not comment. A spokesman for West Virginia University said his consulting work “was based on his 42 years of experience with reproductive neuroendocrinology.”

    Scientists who cross agrochemical companies can find themselves at odds with the industry for years. One such scientist is Angelika Hilbeck, a researcher at the Swiss Federal Institute of Technology in Zurich. The industry has long since challenged her research, and she has been outspoken in challenging them back.

    Going back to the 1990s, her research has found that genetically modified corn — intended to kill bugs that eat the plant — could harm beneficial insects as well. Back then, Syngenta had not yet been formed, but she said one of its predecessor companies, Ciba-Geigy, tried to stifle her research by citing a confidentiality agreement signed by her employer then, a Swiss government research center called Agroscope.

    Confidentiality agreements have become routine. The United States Department of Agriculture turned over 43 confidentiality agreements reached with Syngenta, Bayer and Monsanto since the beginning of 2010 after a Freedom of Information Act request. Agroscope turned over an additional five with Swiss agrochemical companies.

    Many of the agreements highlight how regulators are often more like collaborators than watchdogs, exploring joint research and patent deals that they agree to keep secret.

    One agreement between the U.S.D.A. and Syngenta, which came with a five-year nondisclosure term, covered things including “research and development activities,” “manufacturing processes” and “financial and marketing information related to crop protection and seed technologies.” In another agreement, a government scientist was barred even from disclosing sensitive information she heard at a symposium run by Monsanto.

    The Agriculture Department, in a statement, said that without such agreements and partnerships, “many technological solutions would not make it to the public,” adding that research findings were released “objectively without inappropriate influence from internal or external partners.”

    Luke Gibbs, a spokesman for Syngenta, which is now being acquired by the China National Chemical Corporation, said in a statement, “We are proud of the collaborations and partnerships we have built.”

    “All researchers we partner with are free to express their views publicly in regard to our products and approaches,” he said. “Syngenta does not pressure academics to draw conclusions and allows unfettered and independent submission of any papers generated from commissioned research.”

    A look at the experiences of the three scientists — Dr. Cresswell, Dr. Simpkins and Dr. Hilbeck — reveals the ways agrochemical companies shape scientific thought.

    A Reluctant Partner

    For James Cresswell, taking money from Syngenta was not an easy decision.

    Dr. Cresswell has been a researcher at the University of Exeter, in England’s southwest, for a quarter-century, mostly exploring the esoterica of flower reproduction in papers with titles like “Conifer ovulate cones accumulate pollen principally by simple impaction.” He was not used to making headlines.

    But about a half-decade ago, he became interested in the debate over neonicotinoids, a class of pesticide derived from nicotine, and their effects on bee health. Many studies linked the chemicals to a mysterious collapse of bee colonies that was in the news. Other studies, many backed by industry, pointed to the varroa mite, and some saw both factors at play.

    Dr. Cresswell’s initial research led him to believe that concerns about the pesticides were overblown. In 2012, Syngenta offered to fund further research.

    While many academics resisted efforts by The Times to examine their communications with Syngenta, Dr. Cresswell did not challenge a records request submitted to his university. And he spoke with candor.

    “The last thing I wanted to do was get in bed with Syngenta,” Dr. Cresswell said. “I’m no fan of intensive agriculture.”

    But turning away research funding is difficult. The British government ranks universities on how useful their work is to industry and society, tying government grants to their assessments.

    “I was pressured enormously by my university to take that money,” he said. “It’s like being a traveling salesman and having the best possible sales market and telling your boss, ‘I’m not going to sell there.’ You can’t really do that.”

    The issue soon came up at Dr. Cresswell’s dinner table.

    “Me and my mum were like, ‘Oh, you’re taking money,’” his daughter Fay, now a 21-year-old university student, recalled of the conversation that took place. “We didn’t have an argument, but it did get quite heated. We just said, ‘Don’t.’”

    Duncan Sandes, a spokesman for Exeter, declined to discuss specific research grants. He said in a statement that up to 15 percent of university research in Britain was funded by industry. “Industry sponsors are fundamentally aware that they will receive independent analysis that has been critically evaluated in an honest and dispassionate manner,” Mr. Sandes said.

    But the degree of independence is in question.

    Dr. Cresswell and Syngenta agreed on a list of eight potential causes of bee deaths to be studied. They discussed how to structure grant payments. They reviewed research assistant candidates. Dr. Cresswell sought permission from Syngenta to pursue new insights he gained, asking at one point, “Please can you confirm that you are happy with the direction our current work is taking?”

    But he also pushed back at times. An email from Syngenta to the university said that Dr. Cresswell “will have final editorial control,” but Dr. Cresswell, in another email, expressed concern that a proposed confidentiality clause “grants Syngenta the right to suppress the results,” adding, “I am not happy to work under a gagging clause.” He says the term of the clause was reduced to only a few months.

    Neonicotinoids are now subject to a moratorium in the European Union. A recent study by Britain’s Centre for Ecology & Hydrology attributed a population loss of at least 20 percent of many kinds of wild bees to the pesticides.

    Syngenta and its competitors argue that the real culprit is a disease called varroosis, which is spread by varroa mites. The Bayer Bee Care Center in Germany includes menacing sculptures of the little pest.

    But Dr. Cresswell’s initial research for Syngenta did not support the varroosis claims. “We are finding it pretty unlikely that varoosis is responsible for honey bee declines,” he wrote to Syngenta in 2012.

    An executive wrote back, suggesting that Dr. Cresswell look more narrowly at “loss data” of beehives rather than at broader bee stock trends, “As this may give a different answer!”

    For the next several weeks, the company repeatedly asked Dr. Cresswell to refocus his examination to look at varroa. In another email, the executive told Dr. Cresswell, “it would also be good to also look at varroa as a potential uptick factor” in specific countries where it could have exacerbated bee losses.

    In the same email, part of a chain with the subject line “Varoosis report,” he also asked Dr. Cresswell to look at changes in Europe, rather than worldwide. Dr. Cresswell agreed and said, “I have some other angles to look at the varoosis issue further.”

    By changing parameters, varroa mites did become a significant factor. “We’re coming to the view that varoosis is potent regarding colony loss at widespread scale,” Dr. Cresswell wrote in January 2013. A later email included scoring that bore that out.

    Mr. Gibbs of Syngenta said, “We discussed and defined the direction of the research in partnership with the researcher with the aim of ensuring that it was focused and relevant.” He added, “We did not undermine Dr. Cresswell’s independence, dictate his approach to assessing the eight factors agreed upon with him, or restrict any of the conclusions he subsequently drew.”

    That said, Syngenta was a client and Dr. Cresswell was providing a service. Looking back, Dr. Cresswell said that while he still thought concerns about the pesticides were overblown, aspects of his project were inevitably influenced by the nature of the relationship.

    “You can write it up as, Syngenta had an effect on me,” he said. “I can’t actually deny that they didn’t. It wasn’t conniving on my part, but absolutely they influenced what I ended up doing on the project.”

    For Dr. Cresswell, the affiliation with Syngenta became a burden. Environmentalists saw him as an adversary, and his industry connection came to define him in news articles. When he was called to testify before Parliament, Dave Goulson, a biology professor at the University of Sussex, sat next to him. Dr. Goulson likened taking money from agrochemical companies to taking money from the tobacco industry, which long denied that cigarettes were addictive.

    Some people thrive on controversy. Dr. Cresswell does not.

    “It hurt me more than I was willing to admit at the time,” he said. “Everything happened so fast.”

    He had a breakdown. He said that he began to feel “I was virtually incompetent,” adding that he would put his head on his desk and think his work was a mess. He ended up leaving his job for several months. Although he presented his research publicly, it was never published.

    In an interview, Dr. Goulson said, “I’ve known James for a very long time and always thought he was a good guy.

    “You can’t win,” Dr. Goulson added. “If you are funded by industry, people are suspicious of your research. If you’re not funded, you’re accused of being a tree-hugging greenie activist. There’s no scientist who comes out of this unscathed.”

    Today, Dr. Cresswell has returned to less controversial areas of bee research. He says he respects scientists he has met from Syngenta, but views collaboration with industry as a Faustian bargain.

    He called Syngenta “a kind of devil.”

    “What I didn’t realize is that supping with them would actually have a broader impact on how the world sees me as a scientist,” he said. “That was my misjudgment.”

    A Tangled Relationship

    If some scientists struggle to reconcile themselves with taking corporate money, others embrace complex business relationships.

    James W. Simpkins, a professor at West Virginia University and the director of its Center for Basic and Translational Stroke Research, is one of many outside academics whom Syngenta turns to for research.

    He has focused on the Syngenta product atrazine — the second most popular weed killer in America, widely used on lawns and crops — often co-authoring research with Syngenta scientists.

    Atrazine, banned in the European Union, has also been controversial in America. Most notably, Syngenta started a campaign to discredit Tyrone B. Hayes, a professor it once funded at the University of California, Berkeley, when Dr. Hayes found that atrazine changes the sex of frogs.

    Dr. Simpkins has had a different relationship with the company. In 2003, he appeared before American regulators on Syngenta’s behalf, saying that “we can identify no biologically plausible mechanism by which atrazine leads to an increase in prostate cancer.”

    Dr. Simpkins was also lead author of a 2011 study finding no support that atrazine causes breast cancer. And last year, he was part of a small team of Syngenta-backed scientists that fought California’s move to require that atrazine be sold with a warning label. He also recently edited a series of papers on atrazine for Syngenta, garnering praise from a senior researcher at the company, Charles Breckenridge, who wrote in an email that the “papers tell a simple, yet compelling story.”

    The depth of the financial intertwining of Dr. Simpkins and Syngenta was laid out in nearly 2,000 pages of email traffic, obtained by The Times after a Freedom of Information Act request. Not only does Dr. Simpkins receive research grants, but the company also pays him $250 an hour as a consultant for his work on expert panels, studies and manuscripts, records show. Syngenta even asked Dr. Simpkins to contribute to Dr. Breckenridge’s annual performance review.

    Asking outsiders to contribute to corporate reviews is not unusual. However, Dr. Simpkins is also described in the emails as a partner in a venture set up by Dr. Breckenridge called Quality Scientific Solutions to consult on pesticides and other issues.

    West Virginia University’s website says that “research conducted at W.V.U. is data-driven, objective and independent” and “not influenced by any political agenda, business priority” or “funding source.” And John A. Bolt, a university spokesman, said that all of Dr. Simpkins’s Syngenta-related research had been conducted before Dr. Simpkins arrived at West Virginia in 2012.

    But a review of Dr. Simpkins’s published work shows that he wrote favorable atrazine studies with Syngenta scientists in 2014 and 2015, and listed his university affiliation. Mr. Bolt said Dr. Simpkins only “served as an expert adviser” in the studies.

    In 2014, Syngenta made a $30,000 donation to the university’s foundation. Mr. Bolt said that the donation was made “in general support of the research activities of Dr. James W. Simpkins.” None of the money, Mr. Bolt said, was “used to support research related to Syngenta.”

    Dr. Simpkins’s collaborations with Dr. Breckenridge appear to be expansive. In an email to Dr. Simpkins last year, Dr. Breckenridge sent him a study on the Mediterranean Diet and suggested that they use a multilevel marketing company to help them sell a product of their own.

    “If we could come up with a better Snake Oil,” he wrote to Dr. Simpkins, “we would have access to a massive marketing force.”

    A Critic and a Target

    Some scientists labor outside the industry. It can be a difficult path.

    Angelika Hilbeck worked for Agroscope, a Swiss agricultural research center, in the 1990s, when she began to examine genetically modified corn. The corn was engineered to kill insect larvae that fed on it, but Dr. Hilbeck found that it was also toxic to an insect called the lacewing, a useful bug that eats other pests.

    Ciba-Geigy, a predecessor of Syngenta, had a confidentiality agreement with Agroscope, and insisted that she keep the research secret, she said. Confidentiality agreements are not unusual for Agroscope. In one such agreement obtained by The Times, the agency agreed to return or destroy corporate documents it received as part of a research project.

    Dr. Hilbeck said she refused to back down and eventually published her work. Her contract at Agroscope was not renewed. An Agroscope spokeswoman said the episode took place too long ago to comment on.

    Dr. Hilbeck continued as a university researcher and was succeeded at Agroscope by Jörg Romeis, a scientist who had worked at Bayer and has since co-authored research with employees from Syngenta, DuPont and other companies. He has spent much of his career trying to debunk Dr. Hilbeck’s work. He followed her lacewing studies by co-authoring his own, finding that genetically modified crops were not harmful to the lacewing.

    Next, after Dr. Hilbeck co-wrote a paper outlining a model for assessing the unintended risks of such crops, Dr. Romeis was lead author of an alternative approach with a Syngenta scientist among his co-authors.

    Then, in 2009, Dr. Hilbeck was an author of a paper looking at risks to ladybug larvae from modified crops. Dr. Romeis followed by co-authoring a study that found “no adverse effects” to ladybug larvae. In subsequent publications, he referred to work by Dr. Hilbeck and others as “bad science” and a “myth.”

    “They were my little stalkers,” Dr. Hilbeck said. “Whatever I did, they did.”

    In an interview, Dr. Romeis, who now leads Agroscope’s biosafety research group, said, “Her work does not affect our mission in any way,” adding that the idea of researching the effects of genetically modified crops was “not patented by her.”

    Refereeing a scientific dispute is difficult. But Dr. Romeis and his collaborators do seem preoccupied with Dr. Hilbeck’s work, judging from a review of email traffic between Agroscope and the U.S.D.A. obtained by The Times after a Freedom of Information Act request.

    In 2014, as Dr. Romeis was developing a paper assailing Dr. Hilbeck’s work, one U.S.D.A. scientist, Steven E. Naranjo, joked in a message to Dr. Romeis: “Joerg, its generous of you to see that Hilbeck gets published once in a while :)”

    Dr. Hilbeck is used to looking over her shoulder. “We shouldn’t be running into all kinds of obstacles and face all this comprehensive mobbing just doing what we’re supposed to do,” she said. “It’s totally corrupted this field.”


    Danny Hakim is an investigative reporter in The New York Times’s London bureau.. This story first appeared here. (c) The New York Times. It is reposted here with permission.

  • Keith Woodford says Fonterra’s new winter milk premiums recognise that 12-month production is needed for value-add

    By Keith Woodford*

    Fonterra has recently announced new price premiums for winter milk as from the winter of 2017.  It has done this quietly, without any press release, in an email to all of its farmer suppliers.

     Fonterra says it has ‘taken a fresh look at winter milk’ given increased demand caused by the success of its international value-add and food service businesses. These markets need to be serviced 12 months a year.

     The new contract details are complex and vary between the North and South Islands. In summary, for the North Island there will be 61 days starting mid-May when there will be a premium averaging $3.17. For the South Island, there will be 61 days starting 1 June when the average premium will be $3.92.    Farmers can also supply non-contracted milk at a premium of $1.20 in the North island and $1.40 in the South Island.

    The price paid for the contracted milk, but not the non-contracted volumes, will decrease by 2.5 cents per kg milksolids for every 10 km direct line from the designated factory. And there comes the rub. For the North Island there are four designated factories at Kauri (Northland), Takanini (near Auckland), Waitoa (Waikato) and Longburn (Manwatu). For the South Island, there is only one designated factory, this being Christchurch.

    This effectively mean that milk contracts will be available for most of the North Island but in the South Island they will only be taken up in Canterbury. In South Canterbury, farmers will be more than a little put out by an apparent anomaly that milk going to the mozzarella factory at Clandeboye (near Temuka) will have a transport charge to Christchurch.  That will reduce the payment by about 30c per kg milksolids.

    For most farmers, these winter payments will not be enough to encourage them to milk cows in the winter. This is because winter milking entails major changes to the farming system. But there will be a proportion of farmers who will now give this consideration. 

    The system is designed so that farmers will need to move to either autumn calving, or split calving (spring and autumn), or non-seasonal calving. Milking non-pregnant cows through the winter for extended lactations from the previous spring calving is not going to give the quality that is required, although a few carry-over cows within the herd is a possibility.

    A starting point for those farmers who are interested will be to work out the average premium per kg for the whole season. This is not just the winter premium, but also the so-called capacity adjustment charges already in place for all farmers, whereby milk produced in the peak months of September to December receives a payment 51c less than for the shoulder months (January to May, plus August).

    For spring calving farmers, these capacity discounts for peak milk are just part of the business of seasonal farming. There is actually nothing these seasonal farmers can do to respond to what are meant to be price signals. However, for farmers who autumn calve, they become an important part of the equation.

    To test the overall effect, I took the figures for a specific Canterbury farm that currently starts calving on 1 August and looked at what would happen if this farm shifted calving to start on 1 April (by coincidence April Fools Day!).   With the same lactation curve, but now transposed eight months, and assuming a distance of 80km from the factory, the average price for the season’s milk rises by 95 cents per kg milksolids.

    Assuming a split spring and autumn calving then the premium over all spring calving would be 48 cents and for totally non- seasonal calving it would be 64 cents.

    Under North island pricing, the equivalent premiums are 75 cents for autumn calving, 38 cents for split calving, and 50 cents for non-seasonal calving.

    However, this premium is really just the start of the assessment process. For example, with non-seasonal calving the average lactation shifts to about 305 days compared to about 260 days on a spring calving farm. This shifts the efficiency of milk production by about 6%; i.e. it results in 6% more milk from the same amount of feed (with considerably more milk per cow and slightly less cows).    There are also reduced culling rate for empty cows, as it is not so critical to maintain the 365-day calving interval which is such a big challenge on seasonal farms.  Also, some of the cows are sold at times of the year when cull prices tend to be higher. These gains are all important.

    On the other side of the ledger, winter milking accentuates the need for some form of off-paddock wintering. Also, it shifts the feed demand pattern towards the winter, typically with consequent cost.

    How this all plays out varies considerably across the country. In summer-drought areas within the North Island, there is already a proportion of farms that either split calve or autumn calve. This will be an encouragement to those farmers, and more will choose to join this group. In the South Island, almost no-one calves in autumn without good price premiums.

    The way Fonterra has set up the price premiums, with smaller payments in the North Island than the South Island, reflects that their proposal is aimed at rewarding farmers just enough for the winter milking so that the change occurs on a proportion of farms, with the additional benefits going to all farmers (and investors) through increased dividends.  Only time will tell whether they have pitched the premiums sufficiently high to get the increasing quantities of winter milk that they need.

    Economic logic says that Fonterra also needs to look again at the capacity adjustment charge (currently 51c for peak milk). Almost certainly this still under-estimates the additional value of milk outside the peak.  Increasing this figure would have no effect on the typical spring-calving farm (with the extra shoulder bonuses balancing the extra peak discount). But it would send good pricing signals and encourage further flattening of the milk production curve by those farmers who can make a shift to autumn calving. This would benefit the whole industry.

    My own interest in these systems goes back almost 15 years, but increasingly in the last five years, when I realised that New Zealand would have to flatten the national milk production curve if it wants to be a force in value-add dairy.  It has been a challenging message to communicate.   Hence, I am pleased to see that Fonterra is indeed now taking steps, albeit modest, in this direction.

    The challenge for organisations like DairyNZ is that their extension messages have been honed for many years towards spring-calving systems and low cost production. Similarly, Fonterra has until now an explicit philosophy that farmers should focus on low cost production and that Fonterra as the processor would wear the cost of dealing with peak production.

    This philosophy has worked well with traditional commodity production, but with value-add it becomes more complicated. First, the capital costs of processing tend to be higher, and high plant utilisation becomes critical to the overall product costing. Second, even for long-life products such as infant formula and UHT milk, the inventory costs and working capital increase considerably with a seasonal production curve.  And third, consumers don’t like old stock.

    Traditionally, we have never put manufacturing dates on the label, and in New Zealand it is still not a requirement. However, in China, our largest market both now and in the future, it is becoming a requirement to state the manufacturing date on the label.

    In this new world of non-seasonal dairying, the biggest challenge for farmers is the total change of system. Without thinking things through as a package, including off-paddock wintering systems, it will not add up.   

    Over the last two years, I have taken opportunities to observe and monitor farmers who are pioneering unique Kiwi-systems of modern non-seasonal milking.  The system that I expect to come into favour is a hybrid system where cows still harvest their own feed from pasture for much of the year, spending variable amounts of the day outside depending on the season, and then going back to the barn for the rest of the day.

    This hybrid system seems to be the system that ticks all the boxes for high production, low cost of production, nutrient management and animal welfare. Some farmers are already making this system work nicely.


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

  • Allan Barber finds we are looking at dramatically increased uncertainty in 2017, where change is certain, but also a time where the bold will prosper

    By Allan Barber*

    The surprises keep coming as we approach the New Year. After Brexit and Trump we might have thought we had had enough surprises for one year.

    But now, on virtually the same day, John Key announced his resignation as Prime Minister and, probably of greater global significance, Italian PM Matteo Renzi lost the constitutional referendum which has resulted in the Euro hitting its lowest level against the US dollar for 30 months and plunged stock markets into a state of uncertainty.

    Coincidentally Donald Trump is doing his best to upset the Chinese sooner than predicted by accepting a phone call from the Taiwan Premier which no US President or President Elect has done since the USA broke off diplomatic relations in 1979. The writing is already on the wall for the TPP.

    So, if we are honest, nobody can forecast what will happen to global trade next year, nor exchange rates and investment markets. What we do know for certain is the relative shortage of New Zealand’s red meat and dairy output because of production decisions made by farmers in response to poor returns and, in the short term, inclement weather conditions, whether the impact of drought, wet winter and cold spring in various parts of the country.

    The Beef and Lamb Economic Service New Season Outlook forecasts relatively little change in exports based on a 3% decrease in sheep numbers offset by a 2.8% increase in beef cattle to June 2016, although dairy cattle are 0.9% lower because of the lower milk price which has only started to rise in the last month. Any impact on herd numbers will not occur until next year’s calving. For the 2016-17 year slaughter numbers for all species are predicted to decrease slightly, but this is not expected to have a significant effect on export receipts as a whole.

    The Economic Service anticipates a small decrease in sheep meat export receipts as a result of slightly lower tonnage and receipts affected by the lower exchange rates for the pound post Brexit (although it is still very unclear whether the Supreme Court will allow Britain to trigger Article 50 or if Parliament will vote in favour of it in any case). It is impossible to predict changes to export revenues amid so much uncertainty in our major markets, but anything other than a decrease would be staggering because of the effect of reduced volumes and weaker pound and euro. Demand from China for both mutton and lamb will almost certainly offset the European weakness to some extent.

    Conversely Europe will have no direct impact on New Zealand prime beef exports, but Asia is expected to provide the best prospects for increased values with China, Japan, Taiwan and Korea the main markets. The duty disadvantage in comparison with Australian exports to Japan will continue to present a headwind. Another factor causing concern is the growth of Brazilian exports to China, much of it grey market trade through Hong Kong.

    American demand for manufacturing beef which accounts for about half New Zealand’s beef exports will be sensitive to the internal US cow kill, the NZ dollar exchange rate and the state of the American economy. Economic Service is predicting a 2.5% decrease in price taking these factors into account, while the overall beef kill will be down 1.5%, but these factors will be offset by higher carcase weights because of a lower proportion of cull cows in the kill.

    After two years in the doldrums the dairy sector looks much more promising with the payout pitched at $6 per kilo of milk solids, a dollar above the average breakeven position, a result which looked totally unlikely less than six months ago. This improvement has occurred because of a tightening of the global supply pattern, notably lower milk production in New Zealand and in the EU which rose strongly when the milk quota cap was removed.

    Although it is tempting to think the dairy recovery will be permanent, the present outlook is driven purely and simply by availability rather than a change to high value non-commodity production. There has not yet been a shift in the fundamental structure of the dairy industry which is still driven by farmer ownership and control.

    2017 will be a very interesting year beset by political and consequently economic uncertainty, although I suspect nothing much will have changed in twelve months. Companies and farmers alike will have to run a tight ship to ensure an acceptable performance, but as always there will be opportunities that the bold will seize to their advantage.


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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 was first published in Farmers Weekly. It is here with permission.

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