Rabobank sets the bears among the cows, puts the blame on China

Rabobank sets the bears among the cows, puts the blame on China
Rabobank sees a bear market for the dairy industry for "a prolonged period".

Rural lender Rabobank is predicting a protracted bear market for the dairy industry.

Although international dairy prices were well below levels that would be sustainable in the medium term, there was likely to be a prolonged period of low prices before the global market surplus of dairy products was soaked up, Rabobank said in its latest Dairy Quarterly report.

Rabobank's director of Dairy Research for New Zealand and Asia, Hayley Moynihan, said milk production had continued to expand strongly in global export regions while China had pulled back from buying on the international market while it concentrated on digesting stock it accumulated earlier this year, and other importers had been unable to take up the slack.

"While a bottom appears to have been reached for New Zealand and Australian export prices, market rebalancing will be a slow process and recovery looks some way off," Moynihan said.

Achieving the 2014/15 milk price forecasts would be a challenge without an earlier than expected commodity price recovery or a fall in the exchange rate with the US dollar, or both, the report said.

With the bears running rampant in the paddocks the opening 2015/16 milk prices could be below their historical five year average, the bank warned.

However Moynihan said she expected prices to trend up to a more sustainable trading range during 2015.

"The next year promises to be challenging for New Zealand's dairy producers, however the longer term outlook remains positive, with prices expected to return to more profitable levels for farmers into the 2015/16 season," she said.

Fonterra last week cut its milk price payout forecast for the 2014/15 season to $5.30/kg of milksolids from $6.00/kg.

Economists estimate the drop of more than NZ$3/kg from the 2013-14 $8.40/kg payout will reduce revenues to the dairy sector and the wider economy by around $5.5 billion, or more than 2% of GDP.

Here's Rabobank's full release.

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GN: what of the numbers of interest:
WMP US/ton pricing monthly over the next 18 months
FX NZ/US pricing over the next 18 months
do you have prior quarters forecasts/report on hand for compare?

New Generation of GM Crops Puts Agriculture in a ‘Crisis Situation’


Is glyphosate, being a sodium salt, not too dissimilar to salt water in its effect on killing weeds? Is the long term effect of saturating the land with this herbicide not too dissimilar to flooding a low lying paddock with salt water?

dont know about saturating the land.
go outside measure 1 square meter of lawn ..then spread 0.5ml of glyphosate evenly over it and see if there is and change in the salinity.
you do know why the sea is salty ..dont you?

Hmm lovely pic of some beef cows and calf. Did Rabo pick the pic? Wouldnt surprise me. It was only a few months ago I watched a video of Tim ?? Rabos bigwig dairy crystal ball gazer. He was adamant dairy was on a high for the long term. Cant get much right.

Belle, they are not paid to predict - that's the job of market makers , who never get the chance or wish to disclose their book.

Stephen, will the banks keep lending?

It's not a matter for the local banks but a question for the foreign wholesale lenders which top up our domestic deposit base to allow a ratio of ~140% of loans to deposits.
The RBNZ has tried to encourage an extension of these loans from 90 days to around 1 year or more - but in my view there has hardly been an improvement - view the terms here
So, in summary at best there will be serious renegotiation of the lending terms and in some cases termination which will flow through to the domestic sector with a higher premuim placed on interest rate cost and the added institutional pressure that goes with such outcomes - you can guess the rest..

I cant find it now Stephen, but this Rabobank guy Tim whatever, had a video out, of a meeting he was holding or speaking at in the states somewhere, giving his professional opinion to the world as  the senior dairy  analyst for Rabo. Gee the poor buggers that acted on that professional advice. And Hayley M was spouting it too. I think hes a NZer. oops

Mind you I remember Tony Alexander once predicting the payout was heading for about $2
.50/kg/ms some years ago. It was doom and much gloom. It ended up about the $4.00 mark or more I think.

NOW, for once and for all, will we stop operating under the "All the eggs in the same basket" economic theory. Gee the Greens ideas are starting to look quite good aren't they?

And Labours CGT. Goverment revenue will be haemoraging soon.

Which is why a low broad based financial transaction tax would be better. Better also than GST as it will take care of the GST dodging with online purchasing from overseas

shift the gst liabillty to the trading site

Greens ideas on a sub $5 payout.... "looking quite good" isn't really the decription I'd use...

Dairy prices fall another -7.3% in Fonterra auction, led by big declines in SMP, WMP and butter;

. Big changes ahead for dairy?

does anyone think that Fonterras drive into China... building megafarms and building production over there...  is counterintuitive..???
How would that maximise farmers profits over here in NZ....????
After all it is still a co-operative...????

Hands raised and running in circles... " sell more NZ land to China.... Sell more NZ land to China.... Yes, yes! That'll see us solve this problem... More land to China I say!"

Hands raised and running in circles... " sell more NZ land to China.... Sell more NZ land to China.... Yes, yes! That'll see us solve this problem... More land to China I say!"

They were trying the same thing they use in NZ - listening to their own propganda and throwing money at things.

Megafarms because thats volume of production, and attempting to get value-add products.  5 yrs before TAF Fonterra was trying to split the corporate and co-op suppliers off into different business groups because a profitable funcational ingredients business wasn't glamourous enough and suppliers kept telling them to reduce their debt.  The government was pushing to get Queen St investors to have some more of the Dairy action.

 When shareholders (suppliers) first heard about the split up they told management in no uncertain terms they could shove the split into a place the sun don't sign.   Hence the need for them (politicians and executive) to impliment TAF to work around the existing shareholders.

It has completely zero interest in NZ supplier profits.

This was pointed out loudly by myself and others at the time.
Now, with investor shareholders, Fonterra has a legally recognised peculniary responsibility to look after their interests and their shareholders shareholdings,   and ZERO responsibility towards farmers.

It is not a co-operative. Not since TAF.  Anyone whotells you it is...check their data, ask why they might try to be selling you snake oil.  Who are they in bed with, what is their history, are they just a fanatical diehard loyalist (or quoting one)

A cooperative would be watching it's cost and market structure to bolster it's suppliers - Fonterra has instead implimented a bid to get its own ownership fingers into farms.  this is completely the opposite to supporting the cooperative, and 100% into corporate model buyouts.

Why else would they be selling below cost?

Well said cowboy. You know  it's not a cooperative when you see that in any correspondence from on high they repeat the the word cooperative  over and over, These guys are way to transparent but nobody wants to see it.
On another note I see the 20th of October is nearly here. Who do you think the banks will sacrifice this time ala Crafarms. No matter what you may think of Crafars farming practices the banks move to annex the final payments was a real dirty. So how many farmers are looking over their shoulders?

Same as all the upcoming "farmers meetings"

You don't need shareholders meetings when things are going well...a nice divvy cheque seems to make everyone happy with much less dog&pony timewasting.

.  So when they have to publish propoganda articles in teh newspapers and hold happiness meetings you know something bad is up.

If Fonterra stop looking after farmer interests it is the begining of the end for them. They may become too big and arrogant. They are only as good as the money they can pay. Farmers will be looking at other options in the future if they continue to work more for Chinese interests. Markets always prevail , monopoly power does'nt last. If companies like Fonterra buy farms their farm suppliers will abandon them. The dairy industry could end up like sheep and beef with too many factories and not enough milk to supply and big dinosaur companies with too much debt.

Readers, for those of you dont appear to know, this is what happens when farm incomes fall.
Farmers pay their  rates , power ,phone ,mortgage interest and buy groceries ,a few beers and go fishing. .
They cut back on fertiliser, staff and wages, maintenance, capital work and dont trade in the old range rover on a new one. 
They pay thousands less tax and for some will run at a loss so probably claim a tax credit.
So who suffers? .

well the farmers aren't enjoying it - so I'd say everyone
wehy is Commerce Commission allowing dairy companies to force suppliers to sell product at under cost.   you wouldn't be allowed to do that in other businesses

Comments on the radio yesterday "get ready for expensive beef this summer". With the dark days ahead for the dairy farmers here will there be any reduction in stock numbers as belts tighten? What happens to these excess Daisies?
Will they be shipped off to China or can they be utilised for low cost meat products i.e. beef mince (which was in the aforementioned radio news) ?

Buy chicken, UK farmers are getting under 100 pounds a tonne for wheat. Chicken and pork will get cheap. Feedlots in the States are using the cheap grain to increase weights = Short term spike.

Will the chinese go ahead with the purchase of Lochinvar? It would be looking a bit expensive now?

Can some Dairy experts please comment on
1. US Production, product costs- land, cows, energy, feed
2. Impact of US corn price on NZ Dairy
3. EU lifting restrictions on dairy output
All of the above must have an impact on NZ Dairying.
And finally who thought that having an Auction was a good way to market milk powder?

You forgot to add Fonterras and MPIs push to up production or do you already know the answer.
With the Auction I'm not sure on the good or bad, but I do see that someone was going to do it so better us than "them".

I just wonder what is the effect of:
Dairy price drop>>>
Expanding US dairy farmers start to cut dairy production>>>.
Cows culled>>>
Beef prices down again due to more meat available.
It is all interconnected in the end

Sheep and beef farmers are fully aware of how markets work. Some newcomers in the dairy industry are going to learn the hard way, along with town investors in farming. There is no magic industry that is immune to markets.

Wronggggggg... The Auckland housing matket is.... 

China is the answer to all our problems.

Indeed you are correct Tim12. Human Rights... Blah blah blah.... Corruption? Who cares? Just give me the money, money, money!!!

New Zealand has a great history for standing up for what's right, springbok tour protests, our anti nuclear stance in the eighties..... now selling NZ interests to a communist country where people don't have the right to vote.

It seems souls really can be bought! It makes me want to cry Tim12!

lol :)

I don't agree, and cite the ongoing trainwreck that is the meat and wool processing sectors as an example. Farmers best interest are in working together within a true co-operative model as mentioned above by cowboy. The only reason dairy farmng has been relatively successful for farmers was it's cooperative development which helped manage the destructive winds of 'free' market capitalism, up until the formation of Fonterra, but unfortunately us shareholding suppliers have ignoirantly lapped up the same neo liberal dogma as the sheep and beef sector, and our value creation doesn't extend beyound the basic commodity at the farm gate, after which non farming investors take control and reap the rewards. The sheep and beef industry is in tatters, and apart from some attempted initiative in the wool sector, doesn't look like improving. Take what you get, and fight for the scraps.

examples of in attention abound

There are around 14,000 dairy farmers in the UK, producing a record 3.3 million litres a day. Farmers for Action (FFA) represents around a third of them.
"Talking has run out," said FFA Chairman David Handley.
"The processors don't seem to understand it. Why do they cut prices? Because they can.

“Start Quote

This is an accelerating downward spiral”

Ian PotterIndependent dairy analyst
"Look at the cars they drive - who's making a living out of milk? I can tell you, as a dairy farmer, I'm not."
The average cost of production of a litre of milk is just over 30p. The typical price paid is now around 28p, down from around 35p in April. More cuts are predicted.

So Henry, how much does it cost produce milk in NZ? After you take out the cost of shipping and Fonterras inefficencies and the lack of a large domestic market ,it looks like the UK could whip your asses, if they can whip you anyone can.

well with the price of bottled water in the super market, we should be selling that, rather than running it through the pivots - joke.....
Q could be how much does it cost to produce the DMI. Overseas folk are stagged at the low per hd production and still make money (other years).
to be fair, Fonterra factories run at say 55% capacity compared to usa (+90%) and Oz (say 70%) due to the seasonal supply/production curve. Hence the dryers are big
Like for like its worth say 60 to 80 cents in slack (but do run your own numbers)...
As noted, number one head guy buyer is scheduled to come down here prior the big meet up in Brisvegas. JK better get some buyer action going by then.....
Remember Westland & its payout this year past as well. And the old chestnut of say $400m in earnings taken (annually) by the supermarkets (ANZ) in the last 3 to 4 years (its starting to add up now). That problem is that supers look over the supplier/processor accounts and say, that profit result you have, we'll take it......

well some costs are difficult to chip away
CPW chairman Doug Catherwood said its annual $700/ha water charge was about the same as the gross income of a dryland sheep and beef property.
"So it's a case of landuse change.
"At $700/ha, the annual water charge is half that of Ruataniwha's (proposed water storage scheme in Hawke's Bay). Most other new irrigation schemes are around $1000/ha. It's the debt servicing required to cover the cost of construction and capital."
The annual charge is in addition to upfront capital costs, with farmers in stage one paying a capital cost of $1750/ha in three tranches. For a typical fully irrigated 200ha farm in stage one, this equates to a $140,000 annual charge, in addition to debt servicing on the capital cost.
In full, CPW will cost about $7000/ha, an expense met partly from bank funding and the balance from farmer contributions.
"empty your pockets"
and background from May 2014

Omnologo - did you attend the account meeting in your area?  Director at our meeting got some pretty blunt comments from suppliers.  In fact they didn't have a general question time after the presentations - lack of time was cited, but I believe it more a rather rattled director not wanting to take any more flak. Interesting that payment of dividend was criticised - told they should have retained it, and was answered with - "it hasn't come up at other meetings I have attended up North" and yet I see in the ODT that it was also brought up in Timaru. Are only the Southerners asking the hard questions??

It cannot be that bad, only 25 farmers turned up to the meeting.
A tense air emanated from a Timaru stage as Fonterra directors were questioned about the irregular pricing payout from the 2013-14 milking season.
About 25 South Canterbury dairy farmers attended the meeting yesterday.

Fonterra now holds more meetings in smaller venues - there were three in Southland and two in Otago of which the Timaru meeting started at 11am. Evening meetings are usually better attended.  Though 25 might not seem to be lot Aj, I know in the deep South many farmers were trying to get crop work started before the bad weather comes in this weekend, dealing with calving, etc so sent their comments along with folks they knew were attending or attended the evening meetings.  The timing is somewhat impeccable in almost assuring low turnout.  Also there will be Director/candidate meetings in a few of weeks doing the rounds so farmers may be interested in attending those, to decide who to turn out and who to retain/put in. 

No I haven't attended CO. In my experience, there might be some 'token' questions asked of the directors, before a good all round back slapping event to kick in.

haha - it doesn't happen that way in the deep South, omnologo.  Perhaps because none of the directors are Southern men (as in born and bred) and there is a reasonably large number of immigrant farm owners who are quite business focussed, as opposed to lifestyle focussed as you seem to get up North, a meeting down south can be quite a blunt speaking affair.

Sheep and beef is in tatters? Fonterra is the model sheep and beef should follow? I don't think so.... They are doing what the meat industry did years ago, trying to get big. What will happen next is smaller more efficient companies ( that add value) will gain more of a foot hold, and you will end up with a similar model to sheep and beef.

I don't think sheep and beef should adopt the Fonterra model, but due to ignorance and self interest, they probably will. I agree that the dairy industry is heading down the same soul destroying path as sheep and beef.

Its not due to ignorance and self interest, although that does exist.
 Its due to total lack of control. We are price takers just like you are becoming, Dammit, fight while you still can.

Respectfully disagree Andrew. Historically farmers have sucessfully banded together in cooperatives so as to better manage the negatives of being price takers. Today farmers are price takers by either choice, ignorance or both. Farmers would have to recognise this combined with sound leadership fr anything to change.

That was when ships were made of wood and men were made of steel.

The Chineese are not stupid.
Depress the price of milk. > Depress the price of farms. > Buy more farms

Yep, that's the only viable plan - it all hinges on the price, the tenancy agreements for the ex farmers and the settlement with the bankers.

Spot on Chris-M! We are in the midst of NZs second process of colonisation.  First by the Europeans and now by the Chinese. They have built their 'ghost cities ' and now as cities fill so the land grab of NZ continues in earnest! 
The question is, how many muskets and blankets will YOU get for your little piece of God 's own? 
That is all. Carry on.
the General

and futher- China nearly goes to war with Japan over a little bit of land that is mostly covered by water at high tide.The PRC sends tens of thousands of soldiers to defend a bit of nothing land in a border dispute with India. Yet anyone who dares to criticise them about their wholsale purchase of New Zealand is a "racist" or "xenophobe!" 
Good grief! We are soon to be the fifth little star on the Chinese flag!
Carry on.
General HH

Bang on and predicted by the "xenophobes"

Good on the Chinese for playing the long-game. If New Zealanders are willing to sell-out the next generations of Kiwi's for a dollar then we deserve everything we get.

Self interest needs to be regulated against in the interests of the next

It seems hard to generate coordinated momentum in that direction - witness Australia under the exertions of the Abbott regime -
Australia’s move towards buying up to 12 Japanese Soryu submarines represents a historic and deeply controversial shift in national defence and military acquisition policy....
A Japanese submarine purchase by Australia would further cement increasingly close defence ties between Australia and Japan, but would outrage the Chinese government, which the Australian government is reluctant to offend for fear of economic retaliation. Chinese leaders cling to and exploit memories of China’s suffering at Japanese hands and reflexively accuse Japan and its western allies of wanting to “contain” China. Read more here and here
The price of a contingent trade agreement (TPPA), yet to be ratified? Where does little old NZ fit in?

A very interesting comment SH! Cheers for posting.
There are none so blind as those who's vision is clouded by greed! My quote... You can use it! 
Have be a great weekend ! That's an order !
 General HH, over and out!

Talked to some one recently who is associated to the industry.Their  take on Fonterra was..
..up until recently high payouts have masked current inefficiences in the model.
..transport is a joke.All experienced staff that built the company(s)have left.they got some muppet from lynfox australia to run things .he got rid of those who knew what they were doing and replaced them with yes men.He has since moved on and transport has been taken over by manufacturing.Stupid ideas like getting farmers to specify their own collection time has resulted in buget blowouts regardingextra staff/trucks.Late off farm times have sky rocketed.
fonterra have been focusing on the south island processing and neglecting the north.so now in the peak they have to dehydate milk in the north and ship it south.
they cant do much value added stuff with the best milk in the spring cos during the flush they have to get max thruput so minimal processing.low grade products.
basically in the spring flush all the managers are praying for 2 things.
1 no breakdowns
2 some crappy weather

The "own collection time" is not a stupid idea - however it very badly managed - and in such a way I just can't understand why the Shareholders Councils are ignoring the issue.

I can only assume that the idea is to either (a) deliberately run the company into the ground and blame it on suppliers, or (b) make the "own collection time" as inefficient as possible so that it can be cancelled due to costs

Rather than properly schedule pickups, they use the same "fix time" calculations, and make tankers wait - or just drop them off the run if their pickup time falls into the suppliers window, to be picked up as an "exception handled" later.      This seems to be bacuase the huge software project to manage the runs has never really worked properly, and has several well known bugs, but it's become un-politic to bring it up, and less to expect it to be fixed.  (I get the feeling either the person left, or a foreign (now closed) company created the original software...and Fonterra never owned the code rights, only the usage rights.)

They do have high grade product.  But. like the rest of NZ they struggle to employ such high paid expert workforce if they're not productive, and keeping top scientists and designers occupied is an expensive business.  And since they sell wholesale....

things like late-off-farm issues can be dealt with but they aren't and never have been.
TAF and other corporate activities (eg Sky broadcasts) are the BAU at Fonterra, that's the price of going corporate and forgetting the very co-op strengths that build the company...but that's what you get by worshipping the corporate showpieces, and not the driving force behind the success.
 Thus a Late-off-farm is far more likely to result in a telephone call to tell the farmer to buck up their act or else, or a visit to tell them that they will be helped and that if they don't comply then they will get refused pickup (the latter phrase is deemed "help").  And seriously for a below-proper-cost sale price...just what level of service and cooperation are Fonterra expecting??

- - -
But I've always said they're inefficient "corporates" with a throw munny attitude.
dont tell me folks are going to start realising this?
if that happens they might actually stop listening to their own propoganda/poropoganda-ists and start acting like a market (customer) focussed company rather than a social/political quango.

own collection times may work in waikato /taranaki but in some regions(i.e east coast/lower north island) with suppliers spread over a vast area it cant work efficiently.
im not saying they cant make a high grade product ,just that at peak flows they dont have time/capacity.
i heard that currently "late off farms:"(i.e tanker turns up late) can be as many as 100/week.
2007/08 east coast had 3             ..for the season(2 of which was due to road closure for a fatal accident).
local knowledge has been superceeded by a computer in hamilton..

as a lower north island person I can assure you it is entirely workable.

it's not just the local knowledge, its that the Hamilton computer software isn't particularily effective - things like not allowing time periods for tankers to off-load and clean, even in places with only 1 tanker pad, which can have 10 tankers queued waiting to unload  (resource peaking, the computers model has zero time for unloading and cleaning, so the storage facility has a theoretical instant capacity equal to it's full storage).   It is also based on US roads, so many of the pickups are on the wrong side of the road causing significant delay, and has no way of implimenting "high cost" transit points (eg major roundabouts, crossroads, and townships all have no delay overheads).   Put that together with a fixed contract start time for drivers, ie all tankers leave the grid at the same time, and you've got software which just isn't up to the task which is demanded of it.  I'm amazed the logistics/drivers are doing as well as they are.

Giving some credit to Fonterra, they are fast tracking their expansion plans e.g. Paihiatua, Lichfield, Edendale etc.  They have gone from approx 98% of all milk collected to 87% of all milk.  Despite that 11% drop in market share they are receiving record amounts of milk with an expected 2% (though currently around 6%) increase in milk this season.  They weren't expecting to have to do some of that capital expansion quite so soon, so once these expansions are complete things will run more smoothly.  The expansions will give them more flexibility of product over the flush from 2015 onwards.

Why was there a market signal to produce that extra milk in the first place?  The middle earth a reliable market?
Market intelligence depends on what you want to hear and the size of my bonus.

But was there a market signal to increase production or were there some who thought there was an opportunity to make a quick buck?  An example of this is the rise of the likes of MyFarm. If payout continues to stay at around $5, or less, lets see then what happens to the likes of the more recent MyFarm farms.  Especially if dividends don't rise above the average.
Fonterra, under DIRA, cannot unless in exceptional circumstances, refuse to accept supply. So are required to find a market for all the milk they receive, unlike the corporates and other co-ops who can match their supply to their markets.

CO, what about the non shareholder suppliers? Do any still exist?
 Doa lot of the investment companies focus on management fees? It looks to me, as an outsider, that the big boys have far too much influence in Fonterra.
 Finish the Latte, I hear lake Como is beautiful this time of year, did you make the wedding?

No, George had my address wrong so didn't receive an invite. :-)  
I have been to Como twice at different times of the year and it has always been shrouded in that 'orange glow' that Beijing sometimes is.  I guess I do have to believe others when they say it is beautiful, but I haven't seen it.  I did like Klosters. ;-)
Yep management fees is money for jam for them. Farms 200,000kgs and less are still theoretically numerically able to out vote the big boys.  But some don't bother to vote.  TAF may have been an exception.
Shareholders now have to be on a contract with a share up over time option (3 various options 3,6 10years) or paid up to their three year rolling average production.  The exception to the latter is if they have been approved to sell 'wet' shares in the two opportunities so far. There maybe the odd legacy non shared contract, but if so, I don't think their term wouldn't be for many more years. 

its Ok, syndicate potential investors are often invited to consider their farm investment as similar to putting the cash on deposit at the bank..
that thinking seems to work if you assume the role of management company...

Im sure that if CO had found his invitation he could have run into a few of them. They could have chatted about China demand, mastitis and Hebicide resistant swedes.
 I hear George is after a few rock solid investment oportunities, something for his children.

d p

why are they pushing for increased production?   Does NZ need more "buttermilk lakes"

Agree with the flexibility of product and the good idea of more WMP plant (vs holding butter).

But shouldn't they be working at ensuring profitability, and thus product improvement, rather than increasing supply they don't need?

By selling under cost at market auction, they can hardly claim to be increasing profitability for suppliers.

Sounds like a great partner for a Chinese company, ( a model of communist efficiency).

Meanwhile, Chinese buyers, whose retreat from the market has played a big part in price falls, "look increasingly unlikely to come to the rescue of suppliers", with imports likely to fall by 75% in the second half of 2014.
Even once the largest inventories in China "are normalised, likely by year end, better-than-expected supply growth and worse-than-expected local demand look set to keep Chinese imports below prior-year levels".

Rabo's forecast prices in your link seem to be $300-400 per tonne above recent auction prices.

In their defence its a moving target, and still moving the wrong way by the look of it. I wonder where the bottom is if the Chinese don't buy?

well found