Tough choices are on the table for Westland's co-op members given that the status quo is unsustainable. ANZ's dairy debt exposure has everyone in a tight spot

The latest Global Dairy Trade results did nothing to assuage the feeling that international dairy trade is sitting on the fence and not sure which way to jump.

Although the fall was only -0.4% it is the fourth drop in succession. The positives are that Whole Milk Powder managed to remain unchanged (actually was small fall from US$3,006 to US$2,969) however there have been seven drops in a row and the current price is almost identical to where it was 12 months ago.

The actual main features of the GDT are Butter down -4.8%, Skim Milk Powder up +3.2% no doubt on the back that the EU has now cleared its backlog, and cheddar cheese down 1-.5%.

Westpac have come back to the pack with their forecasts and have reduced their Fonterra farmgate price from $7.20 to $6.90. Given that globally there is a lot of uncertainty around trade by Trump and China it is perhaps fortunate that the GDT price has held up reasonably well.

Today Westland finalise the vote for the Yili buyout. It’s odds-on the vote will be massively in favour of the purchase - not because the shareholders are ecstatic about their company being owned by the Chinese government but there appeared to be a distinct lack of other options and the status quo certainly wasn’t viable.

Human rights issues aside, if you were going to be owned by Chinese I’d take their government well before private companies or individuals.

They will, should be more receptive to being seen to be doing the right thing with their purchases and likely to have a long game in mind rather than taking short term gains and then dropping the investment and copping a lot of flak at the highest level. So rather a Yili than a Beingmate.

A group of disaffected ex-shareholders are staging a last-minute attempt to block to proceedings. They feel that the $11 million they are owed when they withdrew from the co-op is at risk of not being paid and are seeking all of it being paid immediately or they will try and delay the sale until they are. As with many co-ops Westland had a clause which allowed them to pay back shareholder contributions over a staged period, five years in this case. The reason of this clause is to lessen the redemption risk.

This can happen when there is a mass departure from a co-op and if the co-op had to repay contributions immediately it would leave the co-op exposed to collapse etc. In this case the situation is different in that it is the co-op leaving the shareholders so as to speak rather than the reverse. However, when these shareholders left Westland, they knew the five-year payback clause was in place and for all intents and purposes nothing has changed except there is now a different master. Yili has given assurances that they will honour the five-year clause and so it would be highly unlikely any court is going to hold up the deal over this. Yili are paying $3.41 per share and there was a report today that the $1.50 shares (what farmers have paid to buy in to the co-op) are actually worth $1.30.

Peter Langford, the local Fed Farmers rep, when interviewed on RNZ Wednesday said he would be voting in favour simply on pragmatic terms. There was no one else and land prices have already dropped prior to the Yili news due the uncertainty surrounding the co-op. He felt local farmers couldn’t afford to remain dairy farming with a payout 50 cents behind the major players.

ANZ's threats and limits

The temperature between the ANZ bank and the Reserve Bank if New Zealand has heated up with the ANZ making thinly veiled threats to remove itself or at least reduce its holdings in New Zealand. The Australian Prudential regulations also look as though they may create problems if the ANZ balance of capital held offshore is out of kilter with what is held back in Australia. A way around therefore would be to reduce the amount of offshore (New Zealand) lending so the balance is maintained with what is already held in the capital reserves. For agriculture this could make it rather interesting, as with the old Chinese curse. Agriculture has over $62 bln of debt with over two thirds held by the dairy sector ($42 bln). Of this debt about 33% is held by the ANZ bank. So, any ripples in the ANZ banking pond will certainly be felt by the ag sector and in particular dairying.

The biggest factor that leads one to believe that it is a case a bluffing is the $2 bln profit that came out of New Zealand for the ANZ group. The Capital Reserve Ratio balance between what is held in Australia and what is held by subsidiaries offshore is also likely to be lessened with time. The RBNZ proposal is to implement the increases in capital reserves in stages over time so it is not hard to imagine that the Australian reserves also build up at a similar rate. The other issue would be who could purchase the ANZ ‘s loan portfolio as any of the other Australian banks could run into the same issue the ANZ is threatened with.