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PM says European dairy production surge in 2015 a one-off; banks tell him they're being cautious; but a few very indebted farmers will go under; Govt not taking action on Fonterra's tougher payment terms for suppliers

PM says European dairy production surge in 2015 a one-off; banks tell him they're being cautious; but a few very indebted farmers will go under; Govt not taking action on Fonterra's tougher payment terms for suppliers
Prime Minister John talking to reporters in Parliament on November 3. Picture by Lynn Grieveson for Hive News.

By Bernard Hickey

Speaking after Fonterra cut its payout forecast by 25c to NZ$3.90/kg, Prime Minister John Key has repeated his confidence in the long term outlook for dairy, saying last year's production surge in Europe was a one-off and the long-term outlook for demand from the growing middle classes of Asia was strong.

Key said he was also confident that most farmers were resilient enough to cope with the low payouts and that bankers had told him recently they remained supportive of farmers.

"You are seeing some farmers realising this is a tougher period for longer and starting to make changes to on-farm production costs," Key told reporters in Parliament.

"Inevitably you'll probably see some farms being sold, but overall, as we've said before, farmers are very resilient at dealing with these issues. They know they go up and down with prices," Key said.

Bankers he had spoken to were taking a considered and cautious approach.

"I've seen a couple of chief executives in the last week. They're very much taking the view that they're not going to rush to be forcing people off their farms, but inevitably there are a few that are going to be highly indebted," he said.

Asked if he remained confident in the Government's long-term outlook for dairy prices given extra demand from Asia's middle class had been matched by increased European and US output, he said he still saw a bright future. The Government's Business Growth Agenda includes a strategy of doubling the value of primary industry exports by 2025, including significant growth in dairy production and returns.

Key said a ramping up of a production in Europe last year was a technical one-off situation linked to the end of export quotas and a switch of production from Russian cheese to milk powder.

"You've seen a lot of one-off adjustments there, but ultimately they are going to respond like we're responding. Yes, New Zealand farmers aren't making much money and it's much easier for a farmer being subsidised in Europe to eke out a living, but at the end of the day they're still not making money either so you will see adjustments to their herds," he said.

"There's a one-off adjustments happening in Europe. There's a whole lot of restrictions that changed because of what came out of Nairobi, and secondly in terms of Europeans getting rid of subsidies over time so there was a one-off increase."

European governments agreed at a WTO meeting in Nairobi in December to phase out dairy export subsidies by 2018. Europe abandoned its quotas on dairy exports on April 1, sparking a fresh surge in production. US production has also risen. (See chart below)

Finance Minister Bill English also said some farmers would be under pressure and others were having to re-assess their long term outlooks.

He would not comment on the Reserve Bank's decision on interest rates due on Thursday in connection with the lower dairy payout, but said a 0.25% fall in the rate would not do much to help those with the highest debt.

Fonterra's tougher credit terms criticised

Meanwhile, Fonterra's decision late last year to extend its payment terms to 2,000 suppliers to payment within 90 days rather than 30 days has come under fire from some in provincial New Zealand. Some said it had also demanded price reductions from suppliers of contracting and other services of 10-20%.

National MP for Whanganui Chester Borrows has criticised Fonterra for 'bullying' suppliers.

"It's scary to companies who are servicing an industry that is already under pressure and trying to keep people in jobs," Borrows said.

Small Business Minister Craig Foss said he had also seen some complaints about Fonterra's new terms, and he was looking at the broader issue.

"I've already made it a larger priority of mine in my portfolio to look at issues such as extending payment terms and cashflow management for small businesses as they engage with larger businesses," he said.

"There's many large companies doing something similar -- extending terms," he said, acknowledging there was not much the Government could do as long as the company was within the law.

"I think public awareness of how some companies may be operating, that court of public opinion may influence some of the behaviours," he said.

English later told Parliament he was not aware of Fonterra breaking the law on payment terms.

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41 Comments

10
up

good grief...really going to get better, would Mr Key bet his flag on it...

11
up

Tough on the contractors but not yet on staff.

$100,000 - $200,000: 3482 staff
$200,001 - $300,000: 402 staff
$300,001 - $400,000: 138 staff
$400,001 - $500,000: 66 staff
$500,001 - $600,000: 29 staff
$600,001 - $700,000: 13 staff
$700,001 - $800,000: 15 staff
$800,001 - $900,000: 6 staff
$900,001 - $1 million: 8 staff
$1 million - $2 million: 13 staff
$2 million - $3 million: 2 staff
$3 million - $4 million: 1 staff
$4 million - $5 million: 1 staff

10
up

Steady on there Andrewj - as I said earlier today, someone (dairy farmers?) has to help foot the mortgage bills and council rates, or the whole edifice will collapse, including Auckland property prices.

The fonterra factory workers taking hit after hit though. 10 years ago my close rellie was doing about 85k. Now he is lucky to do 55k. And he has way more responsibility and does more hours.

thats because he not in the top 4000.

Not to mention the contracted drivers and other suppliers.

how many of those are Auckland based?
are they paying above what they should as they have based themselves in NZ most expensive city?
why have farmer shareholders not demanded answers as to where the costs are and if the top management has looked into cost efficiency
most of there product is now exported through Tauranga, why is there any need for the head office to be based in Auckland, they are even moving people from cheaper offices in Auckland to a more expensive location.
if they moved back to Hamilton or Tauranga they could reduce costs by 10 to 20% across the board.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1151...

10
up

And if they announced a 50% pay decrease for all of the above - I bet you less than 10% of them would resign.

Would you resign if your employer cut your pay by 50%? I certainly would. Fonterra is not the only employer in Auckland.

Don't they have anyone under $100K?

payroll system doesn't do 5 figures Smalltown.

200 Million for 600 staff? should be reduced to 6 Million

That's just shocking - almost 100 Fonterra staff earn over $500k per year!

its ironic that you have farmers making sure they keep there costs under control and looking for ways to trim back and run lean, and the company they own runs in the direct opposite fashion,

It's a bit like the Government and its bureaucracy vs the tax payer!

Those figures include offshore staff so when converted to NZ dollars it may appear to be more than it would be in relativity to their local wage/salary environment. But staff none the less. ;-)

I remember one of the senior Fonterra expats in Japan had the most incredible house. Living costs alone, way north of $100k p.a.

It is said that you can be sure something is true when it is officially denied. By the same token, if the PM says he has confidence in the long-term outlook of something, you can be sure it has no future. That is the very nature of politics these days.

When we examine the fundamentals, it is abundantly clear that the NZ dairy sector, as currently operating, has no long-term future because it is dependent on:

1. use of fossil fuels for transport of phosphate rock and other farm inputs.
2. use of fossil fuels for collection of milk from farm gates
3. use of fossil fuels for processing milk into milk products
4. use of fossil fuels for transport of milk and other products to markets.
5. importation of phosphate rock, other essential nutrients and assorted farm inputs from distant locations
6. stable climate
7. continuation of global financial systems.

When we consider that the peak of extraction of conventional oil occurred between 2005 and 2008, and that the global system has been propped up since then by unconventional oil which is close to the point of terminal decline, we can appreciate that no system dependent on fossil fuels has much of a future.

https://gailtheactuary.files.wordpress.com/2014/01/tverberg-estimate-of-...

On top of the terminal liquid fuel factor, we are in the midst of the greatest shift in global climate, due to rapid overheating, in all of the Earth's history; the rate of change exceeds all previous extinction event rates by a factor of 10,000. And the rate of change is accelerating. Just when the overheating will reach a critical point that demolishes current agricultural systems is open to debate, but we should not be surprised to see an ice-free arctic this year and a shift to a completely new global climate regime soon after.

http://nsidc.org/arcticseaicenews/charctic-interactive-sea-ice-graph/

On top of all that, the Ponzi global financial system is in its death throes, and is dependent on historically low or negative interest rates for its short term survival.

John Key's job is to pretend that none of the above matters (or even exists), and to maintain confidence in the rapidly failing system.

Undoubtedly the NZ dairy sector has a short term future of sorts, and given the right combination of disasters overseas might even prosper for a while. But 'long term': definitely not.

More talk than action from the PM.

Same with the medical funding needs of Syrian refugees.

“Currently we have 450 refugees with no funding, and there’s new refugees coming in, and we’ve been offered $500 per refugee over two years. It’s a short-term fix, it’s insufficient. The DHB is paying nothing, they’re putting nothing towards refugee primary health in the Hutt Valley.” Read more

Should have gone for the Russian market but the way we have been voting at the UN probably knocks that idea out of the park

Yes indeed. And Obama scuttled our preferred nation status options in China.

Before the ink was barely dry at today's signing ceremony, US President Barack Obama played his 'China hand' saying TPP would give the United States an advantage over other leading economies - namely China. Read more

Indeed, I don't see how anyone benefits from this kind of diplomatic preening. I'd rather deal with the Rusians and Chinese, than the fanatic Saudis and Turks. Yet we side with the fanatical crazies, when a neutral posture could serve us far better.

10
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"If nothing else, a total pig-headed unwillingness to look facts in the face will see us through."

I wouldn't be too sure Prime Minister - China is facing severe headwinds and Kiwi milk was seen as a luxury. Today's latest backward step shows major trade issues for China.

"Exports fell 25.4 per cent year-on-year in February in US dollar terms, compared to the 14.5 per cent drop economists were expecting and a 11.2 per cent drop the previous month.

Imports not so dramatic - only fell 14% versus 19% fall for Jan.

That is only a nudge over the worst slump on record, in May 2009, when exports contracted 26.4 per cent."
(Note the reference to 2009 - not a good time.)
http://www.ft.com/fastft/2016/03/08/chinese-exports-slumped-by-near-reco...

"GOVT NOT TAKING ACTION"

What exactly are they doing - they don't seem to be doing any action at all, immigration, housing, hospitals, roads - why don't they just take the rest of the year off and head of to Hawaii till the elections.

Wow! this must be that "feeling" that Don Key said he had during the 2014 debates about something big is going to happen soon!!

Don't worry, be happy, everything is going to be all-right.

I though the government had little clue as to how farms work when they raised the minimum wage. Last thing the farmers need.

Their whole farm plan is based on high inputs, free water and cheap labour.

Also did anyone notice the central plains water scheme was based on the idea of all the farmers converting to dairy as this was the only farming that could support the cost of the scheme.

The consents to take water from the waimakariri were used as collateral so if/when it goes bust the banks will effectively own the water I believe..

John Key totally out of touch

11
up

except if a ponytail is within reach

To those decrying the government's lack of action - what action can they take? Successive Governments have enshrined the free market economy (foolishly IMHO) so hands off there, this one has signed the TPPA which shuts the door on what ever they do here, a bail out to the famers will only lead to elevated expectations for people and banks who did not understand the business model they were working with. The Government is not a partner in Fonterra, so can't do bugger all there. This is all a salient lesson to farmers and the banks. they need to be allowed to stand or fall on their own merits. It will be hard, but unfortunately that is the way it goes.

the government and fonterra are so entwined its not funny, go back and check all the FTA's we signed then a couple of days later the PM opeing a fonterra facility in the same country.
its a shame they dont put as much energy into our other industries who they are quite willing to through under the FTA bus to help fonterra sell some milk powder

Pollies love waving the flag when invited to open plants, especially in foreign countries. Doesn't mean they played a part in the decision process at all. Certainly they will endorse the opportunity for trade. No the issue here is that the pollies are doing several things, despite their words they are completely unable to see the oncoming train wreck, they don't understand the reasons behind the fall in payouts, they have consistently resisted encouraging diversification in our export industries, they have clung on to policies that has seen NZs jobs exported, the banks fleecing the country, and signed agreements that mean if anyone wants to create new export industries in almost anything well need to get the permission of large American conglomerates first!

Did anyone listen to Bill English on RNZ Morning Report this morning talking about the decrease in Fonterra payout? He seems so totally out of his depth and utterly clueless as to what to do.
Scary stuff but not unsurprising.

when the credit ratings start to fall...

>>>

Trade
New Zealand is heavily dependent on international trade,[208] particularly in agricultural products.[209] Exports account for a high 24 percent of its output,[137] making New Zealand vulnerable to international commodity prices and global economic slowdowns. Food products made up 55% of the value of all the country's exports in 2014; wood was the second largest earner (7%).[210] Its major export partners are Australia, United States, Japan, China, and the United Kingdom.

New Zealand banks' exposure to dairy farming will put their asset quality under pressure as milk prices fail to recover as quickly as expected, according to credit rating agency Fitch Ratings.
"Nevertheless, the failure of prices to recover toward the long-term average of $6/kgMS by mid-2015 will exert pressure on asset quality within banks' dairy exposures," the ratings agency said. "Banks' credit assessments when lending to dairy farmers tend to incorporate long-term average payouts. If payouts remain below levels used for serviceability assessments, these may prove too generous for the most highly leveraged borrowers."

New Zealand banks have significant exposure to the dairy industry, with dairy loans making up nearly two-thirds of total agricultural loans, which account for about 15 percent of total bank loans, it said.

Of the nation's largest lenders, BNZ has the biggest exposure to agriculture loans, accounting for 15% of its total credit exposure, followed by ANZ Bank New Zealand at 12%, ASB Bank at 11% and Westpac New Zealand at 8%.

http://www.nbr.co.nz/article/nz-bank-exposure-dairy-farms-will-weigh-ass...
http://www.wsj.com/articles/banks-feel-the-pain-of-dairy-downturn-145569...

I wonder what the recovery rates will be, every credit extension increases the risks for the banks. Farms at $2kgms will be lucky to recover anything if liquidated. Which may explain the banks reluctance to move. This is the first step on the path to having zombie banks.

BUT BUT BUT .......everyone's "buddy' Mike Hosking says economically absolutely everything is just "hunky dory" ...nothing to worry about......we are "punching above our weight" ! .....move along..... nothing to see here....talk about John Key's media "puppet" ...

Ah well if its only Technical One-off Situation .....

Key said a ramping up of a production in Europe last year was a technical one-off situation linked to the end of export quotas and a switch of production from Russian cheese to milk powder

7. Prime Minister—Statements

[Sitting date: 08 March 2016. Volume:711;Page:7. Text is subject to correction.]

7. Rt Hon WINSTON PETERS (Leader—NZ First) to the Prime Minister: Does he stand by all his statements?

Rt Hon JOHN KEY (Prime Minister): I feel like I have been here before, but yes.

Rt Hon Winston Peters: Does he still stand by his statement of August last year that: “New Zealand should show solidarity with the other countries that have applied sanctions on Russia because of the actions that it has undertaken.”?

Rt Hon JOHN KEY: Yes.

Rt Hon Winston Peters: Then how was it that his former Minister of Trade, Groser—now an ambassador—said about resuming trade with Russia that it was “a step in the right direction”; if not, why is he willing to allow more dairy farmers to go bust while he remains tied down by an informal, off-the-cuff golf course agreement with President Obama?

Rt Hon JOHN KEY: In the latter assertion, the member is quite wrong. But if the member cares about dairy farmers, here is a clue: vote for the Trans-Pacific Partnership (TPP). The single-biggest gainers out of the Trans-Pacific Partnership are dairy farmers. Rather than some mythical Russian who might want to buy something, I can show him 800 million consumers who definitely want to buy something.

Rt Hon Winston Peters: Seeing as he has put that into contention—with respect to, for example, Canada, Japan, the United States, and the EU, and our farmers face $38 billion of preference selling—why has he denied farmers a chance to trade with the world’s second-biggest dairy importer, Russia, considering there has been another drop in Fonterra’s milk price, disastrously, from $4.15 to $3.90, announced this morning?

Rt Hon JOHN KEY: Well, a few things. This will come as new news to the member, but Europe is not part of the TPP. The second point that might be interesting to the member is that one of the reasons that dairy prices have been falling is that the supply that used to go from Europe to Russia is not going to Russia, not just because of the sanctions but actually because they—

Rt Hon Winston Peters: That is the point.

Rt Hon JOHN KEY: Well, OK—maybe you should wander off and study a bit more economics, and work out that they have got no money to buy anything through the front door or the back door. That is the reason prices are going down. Russia is in serious financial difficulty because of oil prices.

Rt Hon Winston Peters: Why can he not understand that some of us are not interested in the fraudulent economics of Merrill Lynch, but in taking advantage of trading with Russia—the world’s second-biggest importer of dairy products—when the European Union, with whom he wants to negotiate now, has taken full advantage of our informal sanctions by increasing its milk product exports in our markets?

Rt Hon JOHN KEY: The member is quite incorrect. Secondly, as I said to him, if he wants to support those dairy farmers whom he now says he believes in, it is pretty simple. Do two things: No. 1—vote for the Trans-Pacific Partnership (TPP)—pretty straightforward; No. 2—the member earlier in the year got up and said: “I will be approaching the Government to help it support and change the Resource Management Act.” Well, I am still waiting. If the member wants to come to talk to me, he should feel free to pop up to the 9th floor of the Beehive.

Rt Hon Winston Peters: I seek leave to table a communication between the National Party and New Zealand First about the Resource Management Act offer that New Zealand First made, but it is a blank paper because it never made an offer.

Mr SPEAKER: Order! That is very difficult for me to put to the House.

http://www.parliament.nz/en-nz/pb/business/qoa

Henry we sided with the USA at the UN on the Syria ceasefire, shifting Syrian boarders

"Russia's air strikes have been a direct cause of this crisis around Aleppo," New Zealand's U.N. Ambassador Gerard van Bohemen told reporters after a briefing by U.N. aid chief Stephen O'Brien.

In summary, the New Zealand quest for a UNSC non-permanent seat at this particular point in time appears quixotic. The timing of its bid is too close to that of Australia, its renewed security ties with the US are bound to be met with concern by US rivals in the UNSC, it does not appear to have the committed support of important UN voting blocs including those that group South Pacific island nations, its best advocate, UNDP director Helen Clark, may wish to remain neutral in the negotiations leading up to the vote, and its competitors for the 2015-16 non-permanent UNSC seat, especially Turkey, are formidable for a number of reasons.

None of this augers well for New Zealand’s chances of winning a non-permanent seat on the UNSC in the near future. That raises the question, again, of what New Zealand foreign policy makers are thinking in pressing the case for selection at this particular point in time.
http://itsourfuture.org.nz/paul-g-buchanan-nzs-security-council-bid/

The RNZ interview showcased a Finance Minister who has no empathy, from a Govt with no sympathy. Its all just numbers; dairy farmers are just members of the Tax-paying herd after all.

John Key says it's OK to "misuse market power", "not unconscionable conduct", not "illegal", so carry on

Demanding of suppliers price reductions, discounts, and deviating from standard commercial practice

Meanwhile over in Australia
Coles and Woolworths spent much of 2014 defending their behaviour in court. The Australian Competition and Consumer Commission (ACCC) brought several actions against one or both of them throughout the year for misleading consumers and bullying suppliers.

In the 1990s, Woolworths was accused of bullying conduct against bread suppliers and the ACCC successfully prosecuted it for misusing its market power and obtained substantial penalties. Victims received no compensation, and the case took nine years to resolve. The ACCC’s unconscionability action against Coles was clearly far more effective for the small suppliers involved.
http://www.lifehacker.com.au/2015/02/what-will-happen-to-coles-and-woolw...

10 December 2015
The Australian Competition and Consumer Commission has instituted proceedings in the Federal Court against Woolworths Limited, alleging it engaged in unconscionable conduct in dealings with a large number of its supermarket suppliers, in contravention of the Australian Consumer Law.
https://www.accc.gov.au/media-release/accc-takes-action-against-woolwort...

courts to order the break-up of companies that misuse their market power

No one can accurately predict where butter fat will be priced next year; it may very well be back at $6. Ergophobia has seen the wild fluctuations many times afore. But like oil with the bogey of unlimited cheap fracking lurking in the background, dairying, with mountains of cheap corn piling up around the world instead of going into fuel, is unlikely to make $ 8+. Remember, Yanks, Brits and and Euro cockies don't need to buy the neighbours farm to up production - they just pick up the phone and buy more corn.