The Weekly Dairy Report

Rural News

The Weekly Dairy Report: Tatua once again leads the pack in profits and predictions

30th Sep 14, 2:08pm by Tony Chaston

The weather is now settling into a spring pattern of volatility with a mixture of weather patterns bringing good moisture levels in most areas that has stimulated daily grass growth in the mid 20’s in the north but barely 20 kg of dry matter in the south.

Herds are being closely monitored for BCS in the preparation for mating, but with cost cutting the use of expensive supplements to improve body condition is being replaced by heavier culling of poor performing cows.

Milk is flowing well nationally, with Fonterra being judged number two in the world for production but ranked well behind in getting extra added value for this increased milk.

Nearly all processors have adjusted their payout forecasts down to the low $5 levels, with only Tatua holding on to a mid $6 prediction.

This small added value processor also led the industry with last years payout at $9/kg ms and proved small can be better if high value quality products can be produced and marketed well.

Fonterra has announced a number of new iniatives enabling it's shareholders to cope with this downturn in dairy prices.

They include the rebranding of its RD1 business, loyalty programmes, the creation of farm source hubs and the setting up of an Equity Partners Fund that will allow another avenue of finance for many of it's heavily indebted shareholders.

The Reserve Bank has intervened by selling currency and talking the currency down, that has seen the exchange rate fall and analysts suggesting more is to come.

Oceania milk commodity prices appeared to lift slightly following a similar trend at auction, and with the currency now easing, this could be the first signs the market is nearing the bottom.

Rabobank’s farmer confidence survey showed plummeting dairy sector confidence levels as they looked to reduce costs and meet new environmental rules amid a falling milk market.

The surging beef market will put more pressure on dairy costs as live bull costs have risen in response to insatiable US demand for manufacturing beef.

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26 Comments

by Dairy farmer joe | 30th Sep 14, 8:08pm 1412060887

This initiative of Fonterra to set up the Equity Partners Fund will be a good idea as long as it is not abused & is monitored correctly.I am all for a fund that especially assists our young farmers into purchase of a herd or farm, if there isn't another avenue for them to get ahead,as is the case for many contract&sharemilkers at present.I believe this in the co-op spirit to assist ,especially the future farmers of Fonterra & keep them in the industry ,rather them leaving through being disappointed.

by Casual Observer | 30th Sep 14, 9:42pm 1412066569

Will be interesting to see the fine print - will existing shareholders be on the block if it all goes wrong - as lenders of the last resort. It's not just NZ farmers, but Aussie farmers and potentially others as well according ot the media release. As only kiwi farmers are shareholders currently, does this mean that it is the foot in the door to open shareholding up to overseas farmers - the 'globalisation of Fonterra by stealth'? I look forward to seeing the fine print but in the mean time I am wary.

While Farm Source started in New Zealand, the co-operative would also look to adopt it in other markets where it was growing its milk pools, tailoring it for those local markets.

http://www.odt.co.nz/news/business/317549/fonterra-equity-fund-move

by cowboy | 30th Sep 14, 9:58pm 1412067522

As mentioned elsewhere, there is little if any protection for existing suppliers and shareholders.

And the likes of TPPA will open shareholders to all sorts of demands.

by cowboy | 30th Sep 14, 9:56pm 1412067385

ah the censors have struck again.

I see my earlier comment was removed.

The comment I'm replying to is just an empty advert - Keep it for the pamphlets "Joe"

by Colin Riden | 30th Sep 14, 8:18pm 1412061490

I thought the Tatua payout was over $10.00 before retentions to fund capital works.

No?

by Colin Riden | 30th Sep 14, 8:21pm 1412061708

This article underwent major revision while I made my comment.

by Stephen Hulme | 30th Sep 14, 8:27pm 1412062020

LOL

by Henry_Tull | 30th Sep 14, 8:29pm 1412062165

Very pleasing result:

Tatua released its financial result for the 2013-14 season yesterday, where the Waikato company achieved a group operating revenue of $266 million and earnings before tax of $136.4 million in 2013-14. That equated to earnings of $10.32/kg milk solids prior to retentions and taxation.

Its final payout for the 2013-14 season to its 109 suppliers would be NZ $9/kg MS and declared a pre-tax retention of $1.32/kg MS.

Chief executive Paul McGilvary said while last seasons result was very strong, the 2014-15 year would be challenging... and.. "holding steady" at around $6.50/kg MS and this would be reviewed in November.

http://www.stuff.co.nz/business/farming/10558833/Dairy-company-holding-steady-with-record-result

and

Synlait Milk says it has received its long-awaited official Chinese tick to be a registered manufacturer of retail-ready infant formula into the huge Asian market.

http://www.stuff.co.nz/business/farming/agribusiness/10562636/Synlait-Milk-gets-Chinese-tick

by Colin Riden | 30th Sep 14, 9:43pm 1412066630

Thanks for that information Henry.

Tatua produces a profit equivalent to Fonterra, pays their suppliers more and presumably increases their equity (via retentions). All from a supplier base that is only 1% that of the our major dairy processor.

by Casual Observer | 30th Sep 14, 9:50pm 1412067057

And unlike Fonterra they have a closed supplier base and will only take milk if it is within close distance of their single factory. Hardly apples with apples Colin. It is a brilliant result, no doubt. But you cannot compare their result to Fonterra's as an aplle with apple comparison. After all roughly 25% of Tatua milk comes from Fonterra via DIRA - until 2016.

Tatua Co-operative Dairy Company chief executive Paul McGilvary told NBR ONLINE Fonterra supplies roughly 25% of its 200 million litres of milk a year but by 2016 it will not need it.

http://www.nbr.co.nz/article/how-tatua-will-cope-without-fonterra-milk-…

by Henry_Tull | 30th Sep 14, 10:14pm 1412068462

yes static policy (and legislation) settings in a dynamic commercial setting.

moving past issue ID & benchmarking treatment needs be carrot based rather than stick..

Looking at industry, processing it is approx. 10% of industry assets (balance being farms). Suppliers must keep control (a la co-op) rather than have non-aligned bodes take the 10% and dictact to the 90% via farm gate price.

Q: is that 2 cents worth yet?

not like it not done

http://www.frieslandcampina.com/english

not doing it - look Oz ward.

and another thing...

by Colin Riden | 30th Sep 14, 10:20pm 1412068853

Tatua has been around a long time time (100 years). Fonterra and its predecessors had multiple opportunities to follow Tatua's model but chose poor alternatives and effectively failed both NZ and dairy farmers.

Stupid, yes. Their main mitigating defense is that their decisions were, and still are, heavily influenced by politicians.

by Andrewj | 1st Oct 14, 5:16am 1412093785

Tatua hasn't gone a production spree, like Fonterra. They get the market sorted first, and then expand. Fonterra expand and then try to find a market. Fonterras inabilty to restrict production is a weakness. Its grown too fast, and now there's an oversupply situation in the commodity market, farmers first response to falling prices is to try to produce more to make more, its reverse psycholgy. If the bank manager wants to see you every month for a chat, its hard to see the trees.

It sometimes feels that every piece of land that could be milked off has been, but if it's not been driven by demand but speculation, then the cold hand of capitalism is coming to a rural town and then to a city near you very soon.

Why did Fonterra pay its last CEO such a huge salary when he was just marketing a commodity and going around the country giving confidence boosting pep talks to producers to increase production? Cui bono?

Why is the MPI pushing for a doubling of rural production by 2025, everyone I ask tells me they are all idiots, I don't belive it, they have a plan, we just don't know to who's advantage. It could just be it's the only idea they have, so they are hanging in there.

I could be that so many in government come from a financial backgrounds and have little or no experience with how real money is created, and the huge costs associated with production today. That, I could believe, that there are people that think its all about confidence and attitude, which I agree with to a point but it pays to have something to back your confidence with, in this case I don't see it, or a plan B and C.

I find it hard to belive there is any reason for the market to correct other than the volumes of milk for sale exceed the demand, however Fonterra are coming out with schemes to increase or at best maintain production, i would have thoght this would prolong the slump.

It could be that China is about to re enter the market but the Chinese propery bust, looks nasty and the alternative to infant formula is stuck on the front of every woman and the rest of them are lactose intolerant.

Oh guy's, I have a genius of an idea, lets expand milk sales to a country where over %95 of the population are lactosse intolerant, don't wory positive spin and good marketing are all we need. give that man a beer.

Lactose intolerance is an impaired ability to digest lactose, a sugar found in milk and other dairy products. Lactose is normally broken down by an enzyme called lactase, which is produced by cells in the lining of the small intestine.

Lactose intolerance in adulthood is most prevalent in people of East Asian descent, affecting more than 90 percent of adults in some of these communities. Lactose intolerance is also very common in people of West African, Arab, Jewish, Greek, and Italian descent. Milk Does Not Reliably Prevent Osteoporosis

Milk is primarily advocated as a convenient fluid source of calcium in order to slow osteoporosis. However, like the ability to digest lactose, susceptibility to osteoporosis differs dramatically between ethnic groups, and neither milk consumption nor calcium intake in general are decisive factors with regard to bone health.

Commercial Lactase Enzymes: Not the Best Choice

Commercial milk products are often depicted as the "solution" to lactose intolerance. These products are enzymatically modified to cleave lactose into glucose and galactose, preventing stomach upset and other symptoms of lactose maldigestion. But even the lactase pills don't solve the problem, as individuals can still experience digestive symptoms.

http://www.pcrm.org/health/diets/vegdiets/what-is-lactose-intolerance

“The countries with the highest rates of osteoporosis are the ones where people drink the most milk and have the most calcium in their diets. The connection between calcium consumption and bone health is actually very weak, and the connection between dairy consumption and bone health is almost nonexistent.”

- Amy Lanou, nutrition director for the Physicians Committee for Responsible Medicine in Washington, D.C.

Don't worry guy's, the marketing boys have you covered. You don't pay them a small fortune to just sit around and try to look good.

by cowboy | 1st Oct 14, 8:33am 1412105606

That's pretty much how I'm reading it AndrewJ. Fonterra's (lack of) plan can be seen by the "advertisers" and "Farmer Joe" (Joe the Plumber for the NZ audience) that get bumped to the front of popular propoganda services.

Fonterra are only playing a 2 move ahead chess game, 3 at best.

They have some weird employees in there, that have no connection to cost of production, but these people (like the Labour pasty core) have been insulated from the market. So with no cost responsisbility (just pay suppliers less, or do claw backs- ie zero risk) production with zero cost reduces the their cost per unit, and everything is profit - the more than can pump into the market the more revenue. margin is guaranteed.

But the co-op is unable to hold these people responsible.

The shareholder representatives, as evidenced by poor payout and Fonterra's terrible risk taking, are unable to speak or guide policy as they should. And they're constantly threatened by political risk.

(and high calcium tends to run with high magnesium and high sugar. The processed diet that the politicians want you on is actually really bad for your health)

by Andrewj | 1st Oct 14, 8:52am 1412106739

Everytime your costs go up and your income falls, it should be reflected in the price of your asset, I mean for gods sake your income is falling. In NZ we buck the trend, land prices go up as costs rise and incomes fall.

Its been long slow and relentless. In 1984 my costs were %35 of my gross sales now they pretty much take the whole lot, but sheep and beef are around %85 of gross sales.

by Henry_Tull | 1st Oct 14, 9:59am 1412110794

here is a mix of comment

http://www.stuff.co.nz/business/farming/dairy/10563632/Fonterra-in-uphill-battle-to-add-value

and

IFCN Top 20 milk processor list 2014 – ranked by milk intake

http://www.ifcndairy.org/media/bilder/inhalt/News/Top-20-milk-processor-list---IFCN.pdf

by cowboy | 1st Oct 14, 11:55am 1412117723

asset is productive land, like Auckland Houses, it has value beyond it's immediate production, that holds it's value up, which is why new farmers face very similar pressure as FHB in Auckland

by notaneconomist | 1st Oct 14, 1:13pm 1412122404

Aucklands housing value beyond immediate production is caused by several factors....supply issue constraints from sources like the RMA, LGA and building regs....then add in WFF and other supplementary schemes that top-up rent payments....then there are issues like the duoploy in materials etc.......

When there are deliberate attempts to hold the value up then the assets get distorted away from actual production.......

New farmers and FHB end up paying a built in premium....which only exists because of the levels of interference........NZ farmers end up competing with off-shore owners who can use a range of features including cheap interest, lower taxes etc which are not available to NZ'ers or that would cause significant risk to NZ'ers if they used those same features.

The value beyond immediate production benefits Councils, Government, RBNZ, several bureaucratic agencies and others who have a special interest........

by notaneconomist | 1st Oct 14, 2:00pm 1412125213

It is not in the interests of the RBNZ to have fluctuating asset prices......the price of an asset to income is not on their agenda.......financial stabiity requiress them to ensure that prices are maintained and rising between 1 and 3 percent....they will do everything they can to avoid asset deflation........the tweaking is endless......The fact is the powers that be would rather devalue the currency than have any deflation and I think the whole lot of them are running scared...I suppose that is what happens when you intervene in everything for long enough that it could all catch up with you and if the general populace ever became aware of how things actually function then there would be a hige problem.

I have seen quite a few signs up around Christchurch in the last few weeks.....For Rent..Offers!......House sales seem to have slowed up here.......although seller price expectations are high......their will be some offical announcement of some directional change to hold the prices up.

Farming really only has foreign buyers to maintain price levels.....so maybe there will be an increase in foreign sales......keeps the price of the asset up when the income is falling....I do however suspect that the RBNZ's intervention in the NZD was to obtain a dip which would offer a hedging opportunity to exporters......(all the little things always add up to something far bigger).

No-one is ever going to care about an individuals cost rising and income falling........farmers will be told to live withing their means along with every Jo bloggs public!........and all those people out there who dislike farmers will agree with the public statements and be going tut tut....(and believe me I have already heard this going on)......first of all they distract the population and media into thinking this is the problem......and while everyone thinks it is the problem they are focusing on that......and not the true and proper way of thinking or acting..........

I understand your frustration......but I'm afraid we are stuck in a time-warp of too many people being ignorant on how they are being played. I don't think assets like land will ever be aligned to income there are far too many people getting a suck off the cherry!!

If the world stopped using GDP as a measure and instead used sensible measures then it would be such a different place.

by cowboy | 1st Oct 14, 7:12pm 1412143951

to many people. plus equity partnerships, plus sharemilkers coming in (FHB), but also land bankers, RMA, council limitations on nutrients, landuse contraints, urban sprawl pushing on land too near city boundaries, conversions coming in as asset rich brownfield development, landcorp, banks wanting to hold the asset prices up. councils wanting to keep their rates values up.

the problem being not farmers living within their means, as they have done so for so long - hence the number 8 wire mentality pervadting the sector. The problem is government and other parasites not living within theirs, and trying to pass on demands and costs ...when the locked in government protected (protected from little guys and suppliers) mega corporate fails to deliver proper returns. It's the lowest value producer, and one of the lowest raw material payouts of the dairy world. Selling super-budget wholesale - and beyond farmer control and influence and against their popular request - is not going to ever achieve respectable "means" to live within, and commodity pressure unless business is changed in the producer area, is always downwards.

by redcows1 | 1st Oct 14, 9:31am 1412109078

Perhaps Synlait vs Fonterra? Fonterra profit down 75%, Synlait profit up 75%. Odd though Synlaits share price is down the last 6 months, Fonterras has risen. Go figure.

by DJ Dave | 1st Oct 14, 1:30pm 1412123401

Tatua hasnt just been well ahead of Fonterra due to a neat little catchment of farms to collect from, and a well established plant that doesnt need investment.

They have some very very smart people running the place, from marketing to product formulation to internal plant efficiencies. They are not top heavy with staff either, like Fonterra. They run a very lean ship. Shareholders are on board 100% with the move to value added.

As far as investment goes, Tatua has invested far MORE than Fonterra over the years, and they have invested in the right things. Not Farms in CHINA. Just this year alone, Tatua is spending $65m on a new dryer. With 87 shareholding families that is $750,000 per family.....in one year.

To make that proportional to Fonterra they would need to be spending $7b based on 10,000 suppliers!!!! I dont see that happening, at least not in the value added area. Tatuas investment in plant and marketing etc has been going on for 5-10 years. This $9 payout hasnt just happened by accident, they have been chasing it.

They simply want to get the most value for every kgMS their farmer supplier sends them. Double digits will be next.

by Colin Riden | 10th Oct 14, 9:19am 1412885966

From the USDA's fortnightly dairy overview, and in reference to NZ:

Some cooperatives have reduced farmgate prices. Some producers have responded by taking steps to increase production, via supplemental feeding, in order to sustain a comparable cash flow.

There is stupid, and then in another league, this (increasing high marginal cost production in the face of lower marginal revenue).

by Andrewj | 10th Oct 14, 9:26am 1412886378

And prices were back again. Almost %10 for WMP.

by Colin Riden | 10th Oct 14, 9:35am 1412886937

David seems to have missed that negative news in his 90 at 9.

by Andrewj | 10th Oct 14, 10:05am 1412888723

Fonterras cost structure is now critical to a lot of farming operations. What is cost Fonterra to make WMP?