Keith Woodford assesses Fonterra's strategic challenges, tactical options and looming risks

Keith Woodford assesses Fonterra's strategic challenges, tactical options and looming risks

By Keith Woodford*

Since the turn of the century, New Zealand dairying has been growing rapidly. Currently, the industry produces about 75% more milk than back in 2000. However, the world of New Zealand dairying is now changing and the growth tide has turned. 

The forces of change are both economic and environmental. 

In the short term, it will be economic factors that determine production. This year we are already seeing North Island but not South Island production decline. There is a strong likelihood that overall production will decline further next year as many farmers try to manage their cash flows by reducing cow numbers and bring support stock back on-farm.

However, in the long run it will be environmental constraints that limit growth. Quite simply, in most parts of the country the days of converting sheep and beef farms to standard seasonal-supply dairy farms with on-paddock wintering are largely over.

Although most farmers are currently focused on short term issues, there is a fundamental question as to how Fonterra will fare longer term in this new environment.

Over the last 15 years, although Fonterra’s milk supply has grown by about 45%, its market share has declined from about 96% down to 85%. With Synlait currently expanding its supplier base, and Oceania also expanding its processing capabilities, this market share is almost certainly going to decline further over the next two years. 

Hit from both sides

In all likelihood, companies such as Synlait, Oceania and Yashili will continue to expand in the medium and long term in response to opportunities for value-add products aimed at China and other parts of Asia. In an overall environment of declining supply, this means Fonterra gets hit from both sides.  

The investor-owned growth companies will focus on what they perceive as Fonterra’s Achilles heel, which is the requirement that every farmer should be paid the same price of their milk. Accordingly, the investor companies will focus on large farms in the major dairy regions, and will ignore the small farms and far-flung regions which are more expensive to service. 

So how will Fonterra compete, given that, in contrast to the investor-focused companies, Fonterra is capital-constrained?

When Fonterra brought in TAF (Trading Amongst Farmers) in 2012, it acknowledged that capital growth would now come largely from retained profits. The problem is that those profits have not been great, and both farmers and investors in the Fonterra Shareholders Fund are clamouring for dividends rather than retentions.

Borrowing is already up near maximum levels, having increased $2.6 billion in the last year, so there is minimal freeboard there.

Given these capital constraints, Fonterra will be forced to largely stick to its existing knitting.

A thought experiment

Accordingly, I have been doing a ‘thought experiment’ as to how Fonterra might fare should both national production and Fonterra’s market share continue to decline.  The idea with a thought experiment such as this is not to precisely predict the future, but to test resilience of the system under adversity.

The specific scenario I have chosen to test is where Fonterra’s processing volumes decline from 1.6 billion kg milksolids as in 2014/15, down to 1.2 billion kg at some time in the future. This could be through a combination of lower national production (such as a 20% decline) combined with a loss of market share (down to say 78%). Or it could be from a smaller overall decline of say 10% (perhaps more likely) but Fonterra’s share thereof dropping to 70%.

In this situation, what would happen to the 400 million shares associated with the lost 400 million kg milksolids?

Well, under TAF there are two options. The first option is that investors come in and buy the earning rights to these shares, with legal ownership held in a Fonterra trust structure. The problems here are two-fold.

First, investors will be wary of the fundamental value of these shares in a situation where Fonterra has over-capacity in its processing facilities. One only has to look to the meat industry for some history as to what happens to profitability in those situations. Also, investors would now own rights to about 500 million shares (including 100 million rights already owned via the Fonterra Shareholders Fund). That lies well outside the parameters of TAF as currently envisaged, and in practice Fonterra would no longer be a co-operative.

The second option would be for Fonterra to buy back the shares. That would be even more problematic, as where would the money come from?

Between a rock and a hard place

So this little thought experiment leads to the conclusion that Fonterra would be caught between a rock and a hard place. Once farmers realised this, then the flight to other investor-owned firms by the large and processor-proximate farmers could become a flood, constrained only by the milk supply needs of those companies, leaving behind the small and distant farmers.

The above thought experiment is not new to me; I have been wondering about it ever since TAF was designed. Fonterra said at the time that they had stress-tested TAF, presumably with their own thought experiments, or those of consultants. But I really do wonder if they thought it through.

The mantra at the time was that TAF would remove redemption risk – which is exactly the scenario I have tested here. However, it has always seemed to me that it would only work for modest redemption, including the ‘in and out’ of shares which was occurring in drought situations.

So the question becomes, have I omitted a strategy which Fonterra can use to remove the risk and that is consistent with its co-operative structure?   My current thinking is that there is no such strategy for Fonterra. In essence, the die was cast the day that TAF was introduced.

Prior to TAF, it was always possible for Fonterra to retain part of the milk cheque to finance growth. This is what Tatua does. Its farmers have long understood the importance of reinvestment. As a consequence, they have got themselves into the happy long-term situation where they can continue to retain profits and still smash Fonterra in the cash payout that farmers receive.

In contrast, even prior to TAF the dominant culture of Fonterra was to ‘pass through’ almost all profits to farmers. That was the way that farmers wanted it, and the directors of that time failed by not standing up and telling farmers that it was a dangerous philosophy that would expose them in the long term.

Lack of flexibility & investment capital

The big problem for Fonterra now is that its company culture and structure is locked into a business environment created when the tide was rising. Very simply, it lacks the flexibility and investment capital to deal with the new environment.

A key feature of Fonterra‘s strategy in recent years has been to focus on whole milk powder. Using Fonterra’s own data, the production of whole milk powder more than doubled between 2008 and 2014, from about 550,000 tonnes to almost 1.2 million tonnes. Much of this was absorbed by China, which increased its imports of Fonterra whole milk powder imports more than ten-fold from about 40,000 tonnes to almost 500,000 tonnes. After going quiet (from over-supply), China is now back in the market again. It is the rest of the world that is largely absent from the market.

A key problem that has never been acknowledged by Fonterra, and never been explained to farmers, is that much of this powder has gone into and still goes into reconstituted UHT milk. Presumably Fonterra must always have known the final destination, but most people did not.  

There is nothing wrong with reconstituted milk if it were not for the fact that this milk is typically not labelled as being a reconstituted product, which by law, according to my Chinese colleagues, it should be. If I put myself into the shoes of the relevant Chinese officials, and seeing a need to manage the pain being felt by their local production industry, then the first thing I would do is to enforce their existing laws in regard to product-labelling of reconstituted UHT. Oh dear!

Critical importance to the whole industry

So how will Fonterra respond? In public it will respond one of two ways. It will either say nothing or it will attack the bearer of bad news. But neither of those responses will solve anything.

Behind the scenes, Fonterra must surely be agonising about how to find a path ahead. In the medium term (beyond the next year), it may well be protected by global dairy industry restructuring – as long as China does not implement its own laws. So there could be another golden period ahead in the medium term. But in the long term, there is a dilemma to be faced.

In all of this, we should not lose sight of the fact that New Zealand has a long term role supplying dairy products to Asia. It is the choices of products, and the way we do it that counts.

The other irony is that all New Zealand dairy farmers need Fonterra to be successful. Given the fundamental imbalance of power between individual farmers and large scale processors, it is Fonterra that sets the farm gate milk price. Investor-oriented companies then have to match this price if they want a supply of milk. So Fonterra remains of critical importance to the whole industry. We need it to be successful.


Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. His archived writings are available at http://keithwoodford.wordpress.com

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

65 Comments

The basic business question is still avoided. It is fundamental and it is straightforward. Why should any customer - business or consumer - choose to buy New Zealand dairy products before those from elsewhere in the world?

We can look at structural issues until the cows come home. But until this question is answered - in as many iterations as it takes - the essential business thinking hasn't begun. Fonterra, MPI and industry leaders appear unable to provide any credible answers, or any answers that aren't conflicted.

It would be good to hear what answers anyone has. They're sorely needed.

MPI aren't doing enough to support integrity of the dairy industry in animal welfare. Instead of policing it they are trying to be friends with farmers who actually need a kick in the butt

Abuse Unchecked

There are also cases of serious abuse in the dairy industry and lack of enforcement of the scant welfare laws that are in place. Prosecution for animal abuse on farms is extremely lax. The Ministry for Primary Industries considers prosecution to be a last resort, and ‘getting a farm back on track' is the priority.

In 2009 one of the biggest privately held dairying operations, Crafar Farms, stood accused of allowing dozens of calves to starve to death.

In 2012 150 starving cows and 30 other cows were euthanised at a Rotomanu farm after being found in a serious state of neglect. The farmer was offered ‘support' for the welfare of his remaining animals.

In 2012 one farmer was convicted of cruelly breaking over 100 of his cows' tails and hitting them with a metal bar. Initially given six months' home detention, he was later imprisoned for two years. Whilst this was a better result, the farmer was not banned from keeping animals.

In 2015 a farmer who starved cows to death was given community service, a fine and disqualified from owning cows for just two years.

In 2015, a worker who beat dairy cows and shot them in the legs, was given community detention and community service. He was not banned from looking after cows.

In 2015, a farmer was convicted of walking cows 12km a day through poor conditions, causing them to become lame and suffer on a wide scale. Despite horrifying vets, he was only ordered to pay a fine and may continue to own cows.

In 2015, a man who was repeatedly convicted of starving calves to death was banned from owning cows for 20 years and fined, but he was not sentenced to jail.

In 2015, a farm manager was convicted of massive cruelty to animals. Cows were beaten, had their tails broken, and were shot in the kneecaps. He was given the largest sentence ever delivered for animal cruelty: four and a half years, which is exceptional.

In 2015, a Taranaki farmer was fined $20,000 for breaking the tails of over half his herd. But he was not prohibited from owning animals or given prison time.

Now compare that to our child and elder abuse stats and sentences.

I don't condone animal cruelty but lets look at the facts.With approx 38,000 people employed in the dairy industry in 2015 six people were charged with animal cruelty.

So kicking a farmer up the butt (violence) will solve violence against animals.....interesting concept !!

NZ milk produced by Fonterra is a grass fed product produced with no GMO's (genetically modified organisms). Well, at least it USED to be...and I guess with the current downturn it probably mostly is again!
As such (grass fed, non GMO) it is a very desirable product on the world market where so much of the food supply is derived from genetically modified grain fed, antibiotic & other chemicals polluted, unnaturally farmed cows.

True, pikowai, you describe a very desirable product on the world market. A pity that the government, MPI, Fonterra, etc, haven't been listening.

‘More and more supplementary feed is coming in through the farm gate – palm kernel and maize silage in particular,’ Bruce Thorrold, strategy and investment leader at DairyNZ (quoted 25 Nov 2014). Dairy NZ data shows that in 2000-2001, about 70 per cent of farms were in the low input category – using just fertiliser and a little extra feed as inputs. The proportion of farms in that low category dropped to 32 per cent in 2012-2013. Those in the “medium” category – bringing in 15 to 20 per cent of the total feed required – went from 17 per cent to 32 per cent over the same comparative periods. In the high input category – with 25 to 50 per cent of required feed coming in the farm gate – went from 13 per cent in 2000-2001 to 28 per cent in 2012-2013.

Regarding GMO feed (Stuff, 9 July 2013): ‘New Zealand Soil and Health Association information points to widespread use of GE feed for dairy cattle, pigs and poultry - basically soy, corn, maize and cottonseed. In 2012, New Zealand imported about 200,000 tones of GE soy, basically from Argentina, the main producer of GE crops.’

(NZ Herald, 14 Nov, 2012): ‘In the last few years, several hundred thousand tonnes of soybean and cottonseed meal have been imported, mostly from Argentina (where almost all soybean crops are genetically engineered), Indonesia and Australia (where most cotton seed is genetically engineered). According to the farming newspaper Straight Furrow, an entire shipment of genetically engineered cottonseed landed in Timaru recently, destined for dairy herds in the South Island.’

Premium consumers have two questions: 'What's in it?' and 'How was it produced?' Our volume strategy has been based on avoiding those questions, and supplying an uninformed, low value market. But things can change...

To be fair workingman, I think Fonterra may have been listening (sort of), but so many farmers are now relying on extra inputs that they are probably confined in what they can demand...as you've noted.
Certainly they got a swift kick from farmers when they made suggestions to keep PKE below three kg/cow! They would have been wiser to have demanded no GMO feeds as a first step, but wisdom is something which appears to come slowly to Fonterra strategists!

I believe the ONLY difference we have in NZ is the "grass fed, non-GMO" advantage and once that's lost there is no reason to choose NZ milk over any other milk.. And buyers are prepared to pay large premiums for this guarantee. Why Fonterra is not paying more for milk in NZ which is guaranteed to be those things, I cannot work out!
It's a bit like the organic milk scenario. Fonterra didn't want to have to put themselves out to collect organic milk in separate tankers from different areas, so basically destroyed their organic supply. Quelle horreur!
Whoever organised that strategy should have been slow-roasted over coals.
Now people are paying three times as much for organic products as ordinary ones. By the time Fonterra gets the 'ship' turned and up to speed, they will have lost years and be way behind the 'eight-ball'.
I can easily see people paying twice as much for grass fed, non-GMO, etc milk products.

I have no problem with maize (and other crops) as long as it is grown in NZ and is non-GMO. You couldn't claim grass-fed status for the milk though...unless it was only fed in the winter when the cows are dry.

I'm glad to have caught your note, pikowai. Your thoughts are very interesting. I share your perception that 'grass-fed, non-GMO' is the critical available differentation for New Zealand dairy, and I'm convinced that this is a platform for significantly increased and expanding value. The same platform is the basis for further improved, added value product lines. Organics are a useful subset.

For our country and this sector to have indebted itself, and degraded its opportunities, to the degrees that it has in following an undifferentiated commodity strategy is a level of short-sightedness and foolishness beyond parody. I have no close access to MPI's or Fonterra's thinking, but the adverse results of their thought processes are incontrovertible - and for the well-being of the country as a whole, which is where my interest lies.

All I can say workingman is that Fonterra had better get it's strategy updated fast as there are plenty of smart, forward-thinking folk out there who will have a small efficient factory up and running in no time flat doing exactly this.

Other questions are also avoided. A recent article talked about the shipping of whole milk, not powder to markets. Process has a factor too. Fonterra must recognise that product recalls cause significant brand damage, so releasing product to market prior to receiving test results is a significant no-no. Also pick up a thread from a few months back - how about added value? what other products can be produced here and exported, and do they capitalise enough on our brand? Plus they spent a lot of years selling their technology to their [potential] competitors. they brought at least a part of the current situation on themselves.

If there is going to such a drop in volume,they will have to either sell or mothball plants.
Too many egos and rush for huge bonuses.

Thank you Keith. That is indeed an interesting 'thought piece'.
Unfortunately, I suspect that this level of thinking is beyond the Fonterra Board. A distinct lack of lateral thought offered at Board level in the past two years suggests so. Did we ever find out why Ralph Norris resigned?
On the subject of 'strategy', I don't think it's really taken seriously at Fonterra. Like so many of their key functions, expertise is brought in (read 'bought') from the likes of McKinsey, Ernst & Young and others of their ilk. Look where it's got them. It might be worth the Board considering how some of these contracts are approved and awarded and the level of independence and objectivity involved in the decision making process.

Fonterra do have a strategy. And it's taken seriously, it's three part, velocity, value and VOLUME. They have been so successful with the last they now complain that it's everyone else's fault, forgetting they even have a company, Mymilk, dedicated to attracting even more.

I was at a social function recently where a number of young dairy farmers were present. I was heartened with their loyalty to Fonterra and belief in the co operative model being their best long term option. To still have 85% of supply is remarkable given the 15 years opposition companies have had to cherry pick the best suppliers. Dairy farmers realise that Synlait, Open Country et al will only pay what Fonterra(or Westland) does and I didn't see the private companies advancing interest free loans to help their suppliers.

All that said it is obvious that they need to get a far higher proportion into value added/ Grassfed differentiated space or wherever the best opportunities are. The important thing is that farmers don't throw the baby out with the bath water and keep control over their own destiny. Sticking together has served them well for over 100 years they just have to make sure they continue to evolve the model and the strategy.

I suspect that part of reason Fonterra has so much debt, was to keep those payouts up. I don't see a way that continued farmer ownership is going to work, looking forward, restructuring and new capital from an outside source.

Aj, as you will have noted I am a big believer in the co op model because without it we as farmers are incredibly vulnerable to the whims of corporates trying to secure their raw material at the lowest possible cost.

That said what I have been surprised about with Fonterra is that their farmers have been happy to go along with their world domination strategy. I have always thought that they should ring fence the NZ co op part of the company and float "Fonterra International" and issue farmers shares which they can choose to be apart of that or not. Too me that would take pressure off farmers to fund the world domination strategy if they choose not to while protecting their domestic interests.

unfortunately once you have the debt many of the options disappear.

The NZ dairy industry is totally unsustainable for many reasons;

1. dependency on rapidly depleting fossil fuels.

2. dependency on rapidly depleting phosphate (and the capacity to extract it and transport to NZ.)

3. dependency on stable global climate systems.

4. dependency on a functioning electricity grid.

5. dependency on global fiat currencies.

None of the above have a life of more than a decade, and in all likelihood several will fall over within 5 years, so the sooner the NZ dairy sector collapses, the sooner we can unhook ourselves from dependency on it and start using land sensibly.

However, since policy is generally predicated on denial of reality, we must expect futile attempts to sustain the unsustainable until one or more of the above brings the house-of-cards down.

.
.

I can't think of any farming system in the world that is not dependant on all of those factors.
If any of those factors were to fail then we would find a way to keep farming anyway, food is somewhat of a neccesity.

Cuban permaculture.

However, Cuban permaculture is designed to feed people locally as opposed to making money internationally, and even permaculture will not survive the abrupt climate change that is underway.

All the fundamental factors get made worse by the minute, especially this

. https://scripps.ucsd.edu/programs/keelingcurve/wp-content/plugins/sio-bl...

Well to take one chicken little example - phosphate rock - I think the hand wringing can be put off for a while yet. Why is it that doomsters always post lists of doom? "World Resources : Domestic reserve data were based on USGS and individual company information. Phosphate rock resources occur principally as sedimentary marine phosphorites. The largest sedimentary deposits are found in northern Africa, China, the Middle East, and the Unit ed States. Significant igneous occurrences are found in Brazil, Canada, Finland, Russia, and South Africa. Large phosphate resources have been identified on the continental shelves and on seamounts in the Atlantic Ocean and the Pacific Ocean. World resources of phosphate rock are more than 300 billion tons.”

“The largest expansion project was in progress in Morocco, where phosphate rock production capacity was being increased from 30 million tons per year to 50 million tons per year by 2018. Elsewhere in Africa, phosphate rock mines and expansions were under development in Angola, Congo (Brazzaville), Egypt, Ethiopia, Guinea - Bissau, Namibia, Mali, Mauritania, Mozambique, Senegal, South Africa, Togo, Tunisia, Uganda, and Zambia. Outside of Africa, phosphate rock mines were in various stages of development in Australia, Brazi l, Canada, China, Kazakhstan, and New Zealand.”

http://minerals.usgs.gov/minerals/pubs/commodity/phosphate_rock/mcs-2013...

And don't forget the ever growing levels of Cadmium contamination esp in Waikato from said Phosphate which will render tracts of that region unfarmable within a decade

I though we weren't meant to mention ' the cadmium?
It sort of went away
http://www.waikatoregion.govt.nz/tr200551/

it has always surprised me over the years the lack of processed products or value-add products that have been developed to export overseas, after many years of visiting the Fonterra tent at field days,(shareholder side) I have not seen much change from a few cheeses and yogurts. it seems the focus is WMP, and for that it will always come down to price no premium for brand

Come on sharetrader, if you are a supplier then you will be well aware that Fonterra makes many and varied value add products. Their lactose product is in 90% of the world's dry inhalers.

There is more than just consumer goods and WMP to Fonterra.
https://www.fonterra.com/nz/en/About/Our+Partners
https://www.fonterra.com/nz/en/About/Research+and+Innovation
https://www.fonterra.com/nz/en/About/Our+Companies

http://www.dfepharma.com/en/about-us.aspx

A yes but to the first sentence. While that is correct, their products are many varied and even innovative, when it came to the massive capital spend to cope with the extra milk that Fonterra had created the bulk of the spending went on WMP. Yes it was the easiest and fastest solution but it was very poor and very short term, Andrews figures help explain why.

I could argue that DIRA had a significant part to play in creating that extra milk, redcows. DIRA meant Fonterra could not 'organically' grow it's milk pool but had to take on all comers. It can take years to build up markets in value add product. However thanks to DIRA, Fonterra didn't always have the time to build those markets, but did have to build the stainless steel to process the milk. It's a cart before the horse situation.

Well said CO.
They barely had time to build the dryers.

Yes but my point is Fonterra have been and still are actively out there wanting more milk.

And paying up in Oz.

"Holding the $5.60 in the face of such a pretty horrific dairy market commodity outlook fares well, particularly when you compare it to other farm gate prices around the world. In New Zealand, the comparative is $3.90."

http://m.smh.com.au/business/weak-global-dairy-prices-hit-murray-goulbur...

I keep thinking ,how close are WMP prices to Fonterra's cost to manufacture.

>>>

Whole Milk Powder contains 96.5 per cent powder (solids) and 3.5 per cent water.

Cows Whole Milk contains approximately 12.5 per cent solids and 87.5 per cent water. This means that there is approximate 7,500 litres of milk in a tonne of powder.

Taking quoted Fonterra figures from their annual reports we see that their production costs are closer to 10 cents per litre.

>>>

Add some freight to that and its not that cheap to make. Last auction WMP made $1890 a tonne. So Fonterra has a cost of producing WMP of somewhere north of $750 a tonne.
That doesn't leave a lot to pay farmers, hence why two milk driers have been shut down. Also why a %10 drop in auction prices plays havoc with farmer returns. If they are talking Euro cents then things are very bad.
Woops, read the article again and they are Euro cents about 9.83 a litre in 2012. 15.3 NZ cents a litre. No wonder they shut some capacity down. Kinda hoping my numbers are wrong.

https://www.agriland.ie/farming-news/calculating-milk-price-from-whole-m...
http://www.dairyinnovation.com.au/di-blog/build-your-own-dairy-factory

I run through some numbers added a bit of inflation and I don't see how Fonterra can be paying more than $1.80 Kg to farmers.
I have no idea of interest costs and corporate over heads but we know there has been significant capital spending due to massive increases in production.

I suspect the situation is much worse than they are letting on.

I I don't think China will be there for us.
The Red Chip casino took another one of its patented 6.5% belly flops last night. In fact, more than 1,300 stocks in Shanghai and Shenzhen fell by 10%—the maximum drop permitted by regulators in one day—–implying that the real decline was far deeper.
China is a monumental doomsday machine that bears no more resemblance to anything that could be called stable, sustainable capitalism than did Lenin’s New Economic Policy of the early 1920s. The latter was followed by Stalin’s Gulag and it would be wise to learn the Chinese word for the same, and soon.

The regime is in a horrendous bind because it has played out the greatest credit spree in world history. This cycle of undisciplined, debt-fueled digging, building, spending and speculating took its collective balance sheet from $500 billion of debt in the mid-1990s to the $30 trillion tower of the same that now gyrates heavily over the land.
Look no further than the hideous debt gains reported for the month of January. Total social financing rose by 3.42 trillion yuan or a round one half trillion USD.

That’s right. On top of it tottering $30 trillion debt tower China has just piled on new debt at a $6 trillion annual rate or 55% of GDP per year!

Even the authorities concede that more than 60% of new debt issuance in recent years has been used to pay interest.
http://davidstockmanscontracorner.com/here-comes-the-red-swan-and-other-...

Andrew,
Fonterra's manufacturing cost of whole milk powder is about $1.75 per kg milksolids. This includes overheads and cost of capital as laid out in the milk price formula.
But these so-called 'milksolids' are only the fat and protein (which is what farmers are paid on).
When converted to milk powder which includes lactose, whey, minerals and a little water), there is only about 550g of milksolids( fat plus protein) in that kg of milk powder.
So the manufacturing cost of milk powder is about $NZ1 per kg or milk powder (roughly $1.75 x .55) or $1000 per tonne.
Converting to USD at current exchange rates give a cost of $USD 670 per tonne of milk powder.

There are some factors I have ignored here, such as hedging and also the purchase of cheap lactose from overseas, which is then 'added in' to the milk powder. But the figures above give the 'big picture'.

Therefore a price of say $US1900 per tonne of milk powder will accordingly support a payout to farmers of about $3.30 per kg MS at a 67c exchange rate
And an international price of $US2500 would 'support' a price of $NZ4.90 per kg MS.

But the reality of payouts is somewhat more complicated than this. This is because the actual milk price to farmers is an amalgam of the international prices for WMP, SMP, AMF butter, and BMP (buttermilk powder).. This year, WMP is bad, and SMP is awful, but butter and AMF are reasonable.

Taking into account all of these other factors, my current estimate is that Fonterra's final payout will be about $3.90 but there is still more 'water to go under the bridge' (or more milk to go into the vat).

The difference between this calculated price (the milk payout per kgMS) and the actual earnings of Fonterra ( from diverse sources including value add, food service and cheese) is the profit, some of which is paid as a dividend and some of which is retained.. Fonterra's profit this year should be considerably better than last year - possibly about 55c per kg MS - but only time will tell.

I trust this is helpful.
Keith Woodford

Thanks Keith, that was just what I needed to hear. So it's good thing they can shift product away from driers and low WMP returns. In the link I posted to the California Dairy Producers they are saying that China was back in the market last month, lets hope they continue to be. Last week they said that the EU is storing 8500 tonnes of powder a week.

Andrew,
The information I see is that SMP intervention stocks in the EU increased 10,000 tonnes in January to about 50,000 tonnes. I have yet to see any figures for February. There are no EU intervention stocks for WMP or butter. As for China, total dairy product imports for calendar 2015 were 1.25 million tonnes, so they never really left the market. But their imports of WMP did decline from 671,000 tonnes to 347, 000 tonnes and that of course is the main product that NZ exports. These numbers are the official Chinese statistics but they are not complete. They exclude the 'grey trade' and they appear to exclude all infant formula and UHT imports, which are accounted separately.
Keith Woodford

Keith, it was in last weeks California Dairy producers newsletter
European dairy producers continue to pump out milk and clamor for aid. According to Dairy Market News, most of the surplus is moving into butter, processed cheese, and SMP production. Last week processors sent 16.5 million pounds of SMP into the government’s intervention storage scheme, the largest weekly volume in years.
At the current pace, the intervention program will be maxed out in around two and a half months. For now, the government has put a floor under the European SMP price at the equivalent of 83ȼ NDM, but this may prove ephemeral.
http://www.milkproducerscouncil.org/updates/021916.pdf

Tables and graphics, wmp vol still knock out 2015

http://ec.europa.eu/agriculture/milk-market-observatory/pdf/trade-main-c...

I feel for the sharemilkers who do not get the benefit of the dividend payment.

At least they are not looking at some serious asset price corrections.

It's all relative Aj. Sharemilkers have no guarantee of a job past their contract and in current times that is a big risk currently. A 40% reduction in stock values affects herd owning sharemilkers the same as a 40% reduction in farm values do, farm owners.

I agree CO. In fact share milkers are more at risk with the heartless banks than farmers as they do not offer land as security. Look to more shareholders herds being sold up by banks as their equity in their herds goes down to levels the banks cannot live with. Farmers with land will be treated with more leniency as banks love land security wise. Cows versus land. No competition.

I can remember times when forex hedging could alter payout + or - $1kg/ms. ;-)

Dairy farm prices are tumbling........farmers equity going up in smoke........greed

So far, there is no evidence of this - at all.

We track farm sales monthly. Volumes are still 'normal' from a 10 year perspective. This includes dairy sales.

We also track $/ha prices by region (including for dairy farms). Again no evidence of price falls in any major dairy region.

And we are tracking dairy farm listings, by region, weekly. Again, no evidence yet anything in that sector is 'tumbling' in any region.

We will report it however if it does show up.

This is not to say sellers aren't getting ready because they are stressed. They may be. Or they may not be. No doubt some of the actual sales are of this type, but prices have held so far. But it is not wholesale exiting.

David Chaston, I hear & know some dairy farms are changing hands behind the scenes via banks/agents to buyers without public advertising. Suppose ably these figures will show up via sales at the end of this season approx April/May. Has been in local media too. = will be interesting.
Return on asset at these current/previous land values?? Sustainable or overvalued ??

Overvalued at $4 a kilo and overvalued in a non-BAU game.

Haha @ non business as usual game
BAU globally tends to be fueled via QE/cheap credit into over valued assets
Maybe low ROA is the new normal ?

Abbey D
Or maybe it's people wanting a safe return of the asset rather than a return on the asset !

Could put there money into shares or gold or a bank and get charged for the prierlidge ( zero interest rates )
May be producing food is a good long term place to be ?

back to $20 per kg ms by end of year i reckon

The cold, hard numbers from USDA’s Cold Storage report weighed heavily on the dairy product markets. U.S. cheese inventories grew at a normal 2.8% pace in January, but that growth represents an addition to already burdensome supplies. At 1.18 billion pounds, domestic cheese stocks are up 12.8% from a year ago; that is the highest January volume since 1985, the days of neon and government cheese.
The Cold Storage report was even more disappointing on the butter front. Inventories grew 41 million pounds from December, a much larger than expected increase of 26.5%. At 196 million pounds, butter stocks were up 31.7% from
January 2015.
For the year, European milk output was 2.2% greater than 2014 and up 7.2% from 2013. Production growth is strongest in the Netherlands and Ireland, but Germany stepped up milk output in December by 6.2% compared to the year before. Germany dairy producers enjoyed a mild December, which likely boosted production per cow. Still, the accelerated growth in Europe’s largest dairy nation represents a concerning circumstance for a world already awash in milk.
European dairy producers are clamoring for government aid and trying to solve their financial woes by filling their tanks even fuller.
http://www.milkproducerscouncil.org/updates/022616.pdf

Thanks for the link Smalltown, interesting times ahead.

Why don't we have a look at our cost structure?

So what would be the actual payout if debt had not increased? and what will the debt be in 3 years? 15billion?

The cold hand of capitalism, will do what needs to be done.

Of course it's been totally corrupted today, someone is going to try to make a killing picking up the pieces using other people money.

The [future] tax payers money as no one else will be left standing.

You won't know it was 'our money', till later.

ComCom questions new dairy conversions' automatic right to supply Fonterra in final industry report

https://nz.finance.yahoo.com/news/comcom-questions-dairy-conversions-aut...?

hear from 3:30

http://www.farmingshow.com/on-demand/audio/bill-english-the-minister-of-...
..could be a longer term adjustment going on here.....

Landcorp supplying %1 of Fonterra's milk, they must be sitting on a bomb.

Meanwhile Canadian farm income will be at historical highs according to Agriculture Canada. BUT...
Average farm family income is projected to reach $136,900 this year, 78 percent of which will come from off-farm wages and investments.

Program payments to producers will decline in 2015 to $2.1 billion because most sectors have been performing well.

http://www.producer.com/2016/02/farm-income-outlook-shines/#.VtTLKjO8cXY...

It's interesting that Canadians also report on farm asset values when reporting farm debt levels. In NZ MSM only concentrate on the debt level. But what is the debt to equity ratio overall?
David would you be able to report this?