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The Weekly Dairy Report: A small lift in the milk auction welcome, but the dry and lower production could influence the year's profits more significantly

Rural News
The Weekly Dairy Report: A small lift in the milk auction welcome, but the dry and lower production could influence the year's profits more significantly

November passes without any rain for the Canterbury province, and last week very hot days dried out dryland pastures rapidly.

Concerns are building for future feed supplies in other regions under the present climate, although the forecasters differ as to the summer prospects.

Advisers urge a reappraisal of summer plans with targets for when to feed out, dry off, cull and go to OAD. They advise not to over graze, apply N fertiliser to boost feed supplies and check the water supply before the long hot summer arrives

Economists are starting to factor in the economic effects of the dry, which could prove helpful for milk prices but negative for production.

And it seems so did the milk market overnight as the auction lifted slightly after four consecutive falls in previous events. The drop in volume offered and impending dry saw buyers competing strongly and prices for powders lifted.

Fats however are still on a downward trend, with butter now $2000/tonne back from its peak only two months ago at US $4575/tonne.

ASB's rural economist Nathan Penny seems certain Fonterra will revise back its 2017/18 milk price forecast - currently it's $6.75  - on Thursday. Penny has adjusted his estimate to $6.50/kg ms and if achieved, is a level all farmers could live with. Fonterra has an announcement due early Thursday morning.

Penny reminds us that over the last two months the weaker NZD has fallen over 4 cents to cushion the fall, but the best guess estimate seems around $6.33 for next year.

National cow numbers drop but production per head improves, as improved feeding and genetics compensates positively to total milk flows.

Changes ahead at Synlait, as its foundation leader John Penno steps aside next year to bring in new blood to take the company forward in the future.

Fonterra announced the contamination dispute with Danone has been settled at arbitration. But shareholders will be grumpy that the $185 million penalty is to be financed from a lower dividend of 0.35-0.45c.

Rabobank's farm confidence survey has taken a big fall, with farmers concerned about how the new government will affect their business, the dairy price fall and the impending dry shaking their optimism for the year.

The Kale versus Beet trials reveal some interesting results, with the lower producing brassica having less negative animal health effects than the higher producing alternative.

Bobby calf numbers processed has fallen this year, as managers rear more animals with beef and wagyu genes to cash in on the beef sectors demand.

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So 4 weeks ago Fonterra said

"The price of butter has surged all around the world and a big part of that is just purely driven by demand for butter products and fat products. And supply hasn't kept up," he says.…

Then today:

Fats however are still on a downward trend, with butter now $2000/tonne back from its peak only two months ago at US $4575/tonne

And the stuff is still $6 / 500g at the supermarket.

I predict the price should fall quite rapidly?


"I think the answer lies 10 years ago, when Helen Clark and Jim Anderton agreed with farm politicians to exempt Fonterra from normal competition law, so it could become the only game in town. Led by ideology to be suspicious of orthodox economics they dismissed the evidence that favoured monopolies are almost always more fat and lazy and exploitative than competitive markets. Instead of requiring that corporatisation create at least two behemoths (one led by Kiwi, the other by NZDG) they colluded with the farmer politicians who were dazzled by the size = market power story."
But Labour's DIRA (enthusiastically supported by National) gave us the added ball and chain of monopoly arrogance, complacency, a limited employment market for executives who fall out with the monopoly, and the absence of competition for benchmarking comparison.'


So the story is as simple as exemption from 'normal competition law' leading to a 'fat and lazy and exploitative' organisation rather than one sharpened by the rigor of competition at the farm gate? Why then was the kiwifruit industry, with its 'exemption' from (apparently) orthodox economics able create so much value for NZ and recover from a potentially devastating disease incursion while the red meat sector languishes in an awful state despite have plenty of competition? I think the answer is more complex than Franks' own reliance on an ideology.


Not as much commonality as one would think. Kiwi fruit keep well, they are grown by lot of growers but mostly in a small geographic regions , the markets are well developed and we always had a proprietary interest. Kiwi fruit are not commoditised like dairy, most countries have almost self sufficiency in dairy but few have self sufficiency in Kiwi fruit. Kiwifruit is frost sensitive and has certain requirements which are well suited to Te Puke and Nelson regions.
With dairy you can adapt, cows have legs, can move, or build a shed. Unfortunately Poland and all the CIS countries are going to be large ag exporters, whats our plan B or even what was plan A again? Im confused.

Amazon went into Wholefoods because, as Bezos said, %83 of the cost of food is in the distribution network and we can do that better, it's what Amazon does.

Helen Clarke admitted that DIRA would cost consumers in NZ up to 400 mill plus a year, from memory.


Thanks. Appreciate the response.

Storage attributes and geographic production concentration are not critical determinants of industry success in my view (happy to debate it).

But commoditisation is -- and kiwifruit is certainly a commodity, but NZ kiwifruit is not (differentiated with unique plant varieties and a laser-focus on taste over volume). China produces at least 2x NZ and is theoretically self sufficient; but is still a v high paying, growing market for NZ kiwifruit with demand for Zespri over their own. The NZ kiwifruit industry had the opportunity to make strategic choices and investments because they 'chose' an industry model that allowed them to do so -- and they made the correct choices.

The NZ dairy industry also chose a model which allowed them to make strategic choices. They (sort of) made a legitimate, justified choice but were wrong (cost leadership in WMP -- Ferrier's misguided belief in 'global domination', unlimited Chinese/developing nations demand, and a plan to unrealistically grow milk production in NZ) while trying to keep a foot in the differentiated camp (some of which they've done very well, e.g. specialty ingredients in China and mozzarella). But my point is they had the opportunity to make the choices. They just made the wrong ones.

Whereas, the red meat sector, in spite of having smart, thinking people involved, excellent production efficiency improvement, great science resources and a desire to change are consistently unable to do so. In my view, it's how the industry has 'chosen' to organise itself (not making a choice is a choice too). While the KF industry requires difficult, tight taste/quality parameters, the RMS basically takes volume to optimise plant capacity utilisation. While the RMS vaguely wonders what to do about consumer preference for locally produced product, the KF works out how it can grow kiwifruit in Northern California.

The answer is neither to compete among ourselves nor about nationalising industries. It's certainly not about lazily following an ideology. It is about thinking clearly about choosing rational industry models right for the industry (just as we do with business models for individual companies) and making the right strategic choices of how to be complete. Surely?


The reason I think the geographical model works is the knowledge base stays close and informed, growers share with neighbours growers are interlinked with a common interest they talk amongst each other and learn. It's why if you want to grow apples i'd do it in HB or Nelson.

Also dairy farmers have an issue with peak supply, thats why WMP is so important, it's takes care of the spring flush. Dairy is a bulky product and carting it all over the country is expensive, it requires larger landholdings and prone to seasonal weather fluctuations affecting supply, either way.
Also if farmers grow it, Fonterra gets to take it, they need to find a way to restrict volumes.
Kiwi fruit growers are good at trying new things and adapting, I think thats harder for those in the dairy industry especially with nutrient limits. The opportunity they had to differentiate, which they blew was A2 milk.

I like how you think.



I agree that if you want to grow apples, do it in HB or Nelson, but more because of the availability of skilled labour and a contracting infrastructure than neighbours to bounce ideas/learn off. It takes ~1,000 man hours p.a. to produce a ha of gold kiwifruit. Without good contractors you're pretty poked. A lot, maybe most, of the kiwifruit expansion seems to be happening outside Te Puke / Nelson, e.g. South Auckland, Eastern BoP, Gisborne; but growers will still find ways to share ideas between post harvest grower liaison managers, field days, monitor orchards, mates in other parts of the country etc.

I think DairyNZ is way ahead of other industry organisations in supporting farmers' practice change efforts, e.g. they methodically mapped and validated the informal network of key influencers across NZ that dairy farmers tend to turn to for unbiased credible knowledge and where/how these people are contacted -- outside of formal industry or commercial channels. Quite amazing.

Of course, it's a spectrum of attitudes, but I wouldn't overestimate kiwifruit growers' willingness to adapt. It's more that they have very clear parameters (early supply, late supply, dry matter etc), clear quality standards and are financially incentivised to meet both. If the sheep / beef guys were similarly incentivised, they'd be the same.

That said, I don't believe nutrient limits in the dairy sector make it tougher for dairy farmers than constraints in other sectors. Many kiwifruit guys can easily load 20k tray equivalent of gold kiwifruit on their vine to maximise volume, but if that crop cannot meet minimum taste standards (MTS), they don't get paid. So they have to juggle maximising crop load, while meeting MTS, while a maximising 'Zespri Taste Grade', while trying to harvest at a certain time -- all around what consumers want. It seems to me a nutrient limit is the same as a MTS, but instead being around what society expects. It's just a limiting factor to drive quality over quantity.

The dairy guys will only have fully blown the A2 opportunity of they don't learn from it. Seems to me with milk's many attributes, growing interest in market-related genetic traits (rather than just production) and excellent manufacturing/food science in the industry, there will be other opportunities if they can embrace a Howard Patterson type of entrepreneurial spirit, give it a crack, and stay the course.

I totally agree re the need to 'manage supply' and they shouldn't be dirty words. Zespri does it by owning the IP and issuing / selling growers' licences to use the IP (e.g. SunGold plant material) based on forecast demand. Seems to work OK (and makes Zespri pretty rich).

Bit long -- sorry.


We are all chasing that 'premium' in the market, in both price and in quality, most of the people I talk to want that premium product to be local.

It's fitting into that niche that perplexes me. We have some very capable marketers in our industry and some very good producers but still we struggle to fit enough volume into that 'premium' market to get the returns we need to justify our over priced assets and high cost structures.

For a few years my 2 year old Friesian, bulls got a premium over my neighbours prime Angus steers, fast forward to this year and my 26kg ram lambs, dragging their testicles on the ground, made top dollar.

So the market signals are very mixed and I'm looking at a world that I think is fulling up with product, mostly the old Eastern block getting into gear.

In Russia low interest loans and a top farm tax rate of %6 are encouraging a lot of people back onto the land. The production gains are impressive, the knowledge of the market I don't think is so impressive.

Friends in France are changing, one sells at local market in Toulouse, getting to where you sell 1500kgs of beef in 3 hours on Saturday morning is impressive and he sells chicken, pork,eggs, cheese on top of that.

Like in the UK they actually have less regulation than we do, so it encourages farmers to try new ideas. Theres a lot of ocean between us and them and a lot of cultural difference between us and Asia.

In the USA a lot more product is going to Asia but they demand different standards, in the beef industry different cuts, there is still transition in the industry as we try to judge the impact of different cuts more trimming etc on markets for grinding beef etc.

In California there is a million acres of almonds, they almost all go to China, the industry is worried just like we are about dependence on one market.

When I left school I remember helping an old local farmer who told me he wasn't worried lambing as he got more for his wool than his lambs. Now wool is a costly by product and it's hard to imagine a time when it was worth more than the meat, when farmers plucked dead sheep and pulled it off fences.


Farmers receive just 11.4 cents from every dollar spent on Thanksgiving dinner, according to the US NFU’s Farmer’s Share publication.…