By David Hargreaves
Global dairy prices resumed their destructive downward path overnight at the latest GlobalDairyTrade auction, with the GDT Index slumping 2.9% and hitting its lowest point since last August.
The key Wholemilk powder price dipped 0.8% to an average US$1971 per metric tonne, which was a particular disappointment, given that futures trading ahead of the auction had suggested meaningful gains were likely in WMP prices.
The modest gains in prices that were achieved in the auction two weeks ago remain the only gain recorded so far in 2016.
The latest auction results have simply poured on more trouble for farmers, following on from Fonterra's decision last week to cut the forecast milk price paid to farmers to $3.90 per kilogram of milk solids for the current season, from a previous estimate of $4.15. See here for the full dairy payout history.
The auction outcome will increase the pressure on banks to pass on to farmers the surprise cut by the Reserve Bank in the Official Cash Rate to 2.25% from 2.5% last week.
This new bad news for farmers comes on the day the RBNZ is due to release results of 'stress tests' it conducted late last year on the five biggest bank dairy lenders to assess the impact of loan defaults by farmers on the financial system.
Farmers have had two consecutive poor seasons of returns. The concern now, however, is that every poor dairy auction from here will put pressure on the projected payout for next season as well.
AgriHQ dairy analyst Susan Kilsby said the large volume of milk that was being produced around the world, particularly in Europe, continued to put pressure on the markets.
"For any substantial improvement in prices to occur we first need to see a reduction in milk production.”
Commenting on skim milk powder (SMP) prices, which fell 2.5% in the latest auction, Kilsby said continued weakness in SMP prices was likely in the coming months.
"Stocks of SMP are building in Europe. Earlier this week the European Commission announced a range of measures designed to support its dairy farmers. The support mechanisms will distort market signals and therefore European farmers are likely to continue to produce more milk than the market requires.”
ANZ rural economist Con Williams said the international market had clearly not taken well the extra volume of skim milk powder, butter and anhydrous milkfat that were added for the April and May upcoming auctions.
"This combined with the spring flush in the Northern Hemisphere providing buyers with lots of options and time to source product. The two positives from the auction were a lower NZD [which dropped to US66c from US66.5c before the auction] and the steepening in the WMP curve (with later delivery contracts increasing).
Williams said, however, that Fonterra’s latest milk price update of $3.90/kg MS assumed no change for international prices, "so a renewed run of softer auctions could provide downside".
"With international prices bouncing along the bottom, a conservative approach to early season budgets for 2016/17 should be taken around the mid-$4/kg MS."
Williams said focus would now shift to Fonterra’s first-half results to be released on March 23.
"While we don’t forecast dividend earnings the underlying momentum and other restructuring activity should at least support results toward the top of the current guidance band ($0.45-0.55/share).
"The market will need to be on the watch out for other activities to aid farmer cash flow too. This is likely to include an extension of the farmer loans offered earlier in the season and the possibility of paying out 100% of the dividend (current guidance infers 75-80%). Of course both have implications for Fonterra’s debt position and the strategy of trying to push more milk into 'value-add' products/channels."
Meanwhile, Fonterra confirmed today that its Kaikoura site - which Fonterra earlier said employed 22 people - would be closed. Fonterra first announced likely closure on March 1 and confirmed it today in this statement:
Fonterra Co-operative Group Limited has today confirmed the permanent closure of its Kaikoura site, following the conclusion of staff consultation.
Mark Leslie, Director New Zealand Manufacturing, says the decision to close the site has not been made lightly.
“While it is difficult for the people involved, we have a responsibility to our farmer shareholders and unit holders, and our customers to be as efficient as possible across our business, especially given the low milk price,” says Mr Leslie.
Kaikoura’s cheese volumes will be split between Fonterra’s Lichfield, Clandeboye, Stirling and Whareroa cheese plants, where cheese production is up to 16 percent more cost effective than at Kaikoura.
Mr Leslie says the Co-operative has a long history in Kaikoura and staff and farmers feel a strong connection with the site.
“We are conscious that this is a difficult time for some local farmers, staff and their families, and the wider Kaikoura community. We are doing what we can to support them through this change,” he says.
“Based on consultation, around half of the site staff have indicated their interest in redeployment elsewhere in the Co-operative, and we are confident we will be able to meet their wishes.
“While we obviously would prefer to retain all of our staff, for those who are interested in moving on we will be providing assistance in their search for new roles outside of the business,” says Mr Leslie.
The final day for processing at the site is expected in mid to late April.
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70 Comments
And so the world moves on....
http://m.smh.com.au/business/murray-goulburn-secures-infant-formula-con…
Australia's biggest milk processor, Murray Goulburn, will spend up to $300 million beefing up its infant formula operations after securing a long-term contract to feed Indonesian babies.
The dairy co-operative will supply formula to Indonesia's Kalbe Nutritionals and American infant nutrition giant Mead Johnson.
Murray Goulburn declined to reveal the length of the contracts but said they were long-term and would "underwrite" its long-planned upgrade of its nutritional powders factory in Koroit in south-west Victoria.....
"The markets are at an interesting point," Mr Helou said. "[The price of] commodity dairy ingredients namely skim milk powder and whole milk powder... is at historic lows and is looking like staying there for a while because of the change in buying patterns in China and the embargo in Russia.
"However, the story is different when you look at ready to consume dairy food. We've seen continued strong growth in Asia, and in China specifically."
For example, he said while China brought in 50 per cent less commodities in the past 12 months, it bought 50 per cent more dairy foods compared with 2014.
.... a deliberate Chinese strategy? Pump up dairy, pump up housing....then pull the pin and then buy at fire sale prices. While at it well do what we like with your FTA as well.....
http://www.radionz.co.nz/news/national/299028/china-accused-of-unfair-p…
NZ vigorously pursuing the TPPA agreement , whereby the US specifically intended dictating Chinese trade terms, was bound to have consequences.
Nah mate , you cant blame China for this one ............... we all knew it was coming , but NZ DAIRY Inc. ignored the warnings .
When the EU signalled in 2013/ 14 it was to stop the 30 year old subsidy to farmers to NOT produce milk , we should have known the floodgates were going to be opened .
Was it ignorance or hubris or both that made us think we were bullet-proof ?
The reality is that our milk is no different to a litre of milk anywhere else , its a commodity like a litre of diesel or a can of beans , and we now face serious competition ............. and its not going away anytime soon
Fonterra was in some respects bound by its constitution. It was bound to take all the milk it was offered. So with the massive growth of milk supply the cost of expansion horizontally just to cope with the supply hamstrung it in its ability to invest vertically. This really needs to be changed as does the obligation to supply new start up companies with milk.
Red herring Zeebeck. Fonterra want all the supply they can get, its part of their 3 Vs strategy. They paid double what the next best tender was offering for New Zealand dairies to get the suppliers, they have a company called Mymilk actively looking for more supply (and failing).
This new supply then comes with a need to buy shares at the going rate to pay for more SS so the new suppliers don't get in for nothing unless Fonterra lets them and for the average farm that's a contribution of nearly $1m.There are also limitations on new supply in areas they don't already pick up from.
All this is because Fonterra wanted it that way.
Yeah..it suited Fonterra to take all the milk they were offered,regardless of where it came from...don't forget the big V for volume...only one. V left now, that's Velocity as in speed taken to go down the tubes with all this hubris. Add in arrogant weak willed directors who had one eye on maximizing the milk payout to keep their own farming ventures afloat...they had little interest in boosting the amount of retained earnings for brand development.
Have you heard of Corporate Hubris ?
Have you heard of Marguerite Rigoglioso and Ulrike Malmendier of Stanford University ... probably not , so you should google them on the topic of HUBRIS in business
You're right , they don't own the building which makes it even worse , the premium rental being paid for something like that must be eye-watering .
And as I said , its the last thing a bunch of struggling famers need , want or can afford .
Fonterra is suffering from corporate hubris
That there is just typical of the arrogance of their executive culture. They are making cuts though - twenty two dairy factory workers laid off for a saving of, what, five minutes running cost for the Auckland edifice and it's army of overpaid parasites. How long before the Cockies show up with the tractors, cow shit and pitchforks?
People have paid too much for land and the servicing of those loans has made production costs for many farmers too high to cope with when the pay out is at current levels. John Key is not at fault. Those who were willing to pay top dollar for their land and cows only have themselves to blame. No one made them do it. White gold and the prospect of finding it clouded their judgment.
'approved under Labour' ?
Im pretty sure dairy conversions were non - notifiable (which in my view was very shortsighted) in Canterbury .- so were hardly approved under Labour.
When there was a whiff of change coming - Nationals Dairy interests stepped in and knee capped local representation - the rest is history .
Non notifiable and not needing a consent are two different things. I didn't realise that E-can - under the Labour government didn't require consents to be obtained for dairy farms. So long as a consent was required and Labour was in power, then these farm conversions were consented while Labour was in power.
This is what some Regional Councils (democratically elected) are willing to decide
http://www.stuff.co.nz/business/farming/dairy/77790133/schrader-mains-l…
Why do I have to blame myself for getting in to the dairy industry 30+ years ago ex agent. There are many, many farmers who have owned their farms 15+ years, and like us only own one farm. The costs structures are still set as though farmers are receiving $8.40 by our suppliers and servicing agents and as Aj says below - local government. The first two are now also struggling and some are having to make significant staff reductions and in some cases close their doors. Expect more of this over the next 12 months. Farmers will be the tip of the rural service towns/cities iceberg if this continues for another 12-18months.
What you don't appear to understand is that this is not the first time long term farmers have been through a situation like this - it has happened before. The difference now maybe the length of time it will remain so. In the past it has lasted about 2.5 seasons. People are planning for this one to go longer, so the effect on our rural urban communities will be felt earlier and harder.
CO I assume you have minimal debt and a modest overdraft unlike those who bought in recent years and owe the banks multiple millions and therefore their cash flow needs are far higher than yours. There are also a number of them who have converted or bought the neighbour(s) and have borrowed the necessary millions. I would not want to be in their shoes at present as I am reading that this has years to run not months.
Good luck if your waiting for costs to come down, my reading is that you will have to basically winter on, probably rear your own replacements and grow your own supplements. Thats easier said than done, because it plays merry hell with your revenues. However if you value your land at what you paid for it 30 years ago, it could still be a pretty profitable venture.
We do winter on our own land, our sharemilkers rear all their replacements and we grow all our own supplement. Always have done. ;-)
Your comment is very simplistic. Our costs that have gone up and those that have the potential to make an impact even on a system such as ours are the ones we cant control - rates, yearly regional council dairy fees, plant r&m, plant purchases - MPI requires all farm milk to be cooled to a certain temp which will cause up to 5 figure spending on some farms that do not have issues under the current system. Now having to employ 'expert' nutrient advisers to write a nutrient management plan that no one is going to look at etc etc. Our industry requires us to have more Plans than the Regional Council - yet no one audits them. Animal health treatments have sky rocketed, wages have gone up, herd testing is now a five figure cost for a farm our size, artificial breeding costs and it's attendant record keeping costs, electricity etc etc. Not all these costs are ours as farm owners, some are our sharemilkers but it doesn't make any difference - they are having to meet these costs on a much reduced payout too.
Yes we will survive, but not without some gouging out service/supply/contracting/retail sectors of the rural community too.
Also clouding their judgement was govt rhetoric about doubling export earnings....
https://mpi.govt.nz/about-mpi/our-strategy-2030-growing-and-protecting-…
or maybe they were influenced by John Key and Chairman Xi in Nov 2014
Since New Zealand's FTA with China in 2008, trade have increased at 20 per cent a year.
"China has 1.3 billion people and our market is huge," Mr Xi said.
" Fine quality products from New Zealand ranging from dairy produce, wool, beef and seafoods are highly popular among Chinese consumers.
"So worries that New Zealand does not have a market for its products in China are totally unnecessary. On the contrary. Possibly New Zealand might have to worry about the fact there is more Chinese demand than you can possibly supply."
Mr Key said the relationship was "dynamic and forward looking."
There was still room to grow and he was confident two-way trade would reach the new target of $30 billion by 2020, a target set in March this year."
Silly farmers to go about believing their govt or their bank.
You are delusional .
You need to understand the dynamic shift that European dairy production is undergoing now that the restrictive quota system has been abolished .
And you need to go to China and see that most Chinese are hopelessly poor , and those that can afford our dairy produce now have options ................ milk powder from Holland , Germany , Poland and France ..... and because of the Euro problems, its cheaper than ours
You are delusional
you mean, thats delusional (and no again its policy summary).
alternatively you are confusing your SS's
https://www.youtube.com/watch?v=N99Ps4nLBGU
Roberto Benigni as SS.
(or policy guy)
Okay , I apologise .
Its interesting to note how quick we are to make judgements on misinformation or wrong assumptions , and the Chinese are an enigma , we don't understand the dynamics at play and we cannot fathom what might happen next .
The reality is that the milk price has dropped for reasons we knew were in play or likely to occur , and we cannot defend the indefensible
From the scrap book: 20/03/2014.
The meeting also saw the formal approval of a new target to raise two-way trade between New Zealand and China to $30 billion by 2020, although the release announcing the target was accidentally distributed to the media almost an hour before the meeting took place.
"I think that's eminently achievable," Key said after the dinner.
"But as President Xi said when we were having the discussion, that just means China's got to drink a lot more milk, and they're up for that."
http://www.stuff.co.nz/national/politics/9847806/Chinese-leader-to-visi…
to forgive does not mean forget..
to move forward we need appreciate how we got here.
Its easy with the great benefit of hindsight to blame dairy farmers for being greedy and foolish, thinking the golden run of pricing would never end.
Don't get me wrong there plenty that were greedy and borrowed recklessly, just as there is a vast majority who stuck to their knitting and will get through just fine.
What is really getting up my nose is that those that encouraged this mood of over optimism are now running for the hills and accepting no responsibility. The govt with its business growth agenda's and overhyped trade deals. Banks who sell themselves based on their plethora of overseas based expert analysis's who were happy to do status quo budgets at overoptimistic levels. And exorbitantly paid dairy company executives who have all completely failed to get even close to forecasting the actual reality.
I wouldn't mind if there was even a tiny bit of contrition from any of the above but they all seem happy to step aside and let the dairy cockies take the wrap and offer platitudes like "resilience" .
Ex agent you need to be put on a shorter leash and preferably one with a muzzle.
Some of the dairy farmers facing financial problems have not even purchased land....they are sharemilkers!!!
Why all the ridicule and blame? It is not going to solve anything! These farmers have taken on risk, they have worked hard, they have put everything on the line physical, mental and emotional yet I sense you get some sort of satisfaction in kicking them when they are already down........these farmers are brave and should be recognised for their guts and determination for they have got off their rear ends and have given it a go........it is easy to sit back and undermine others and essentially attack them for a failure....humans are better for trying and failing than never having tried in the first place..........why the mocking of farmers who left school at 15?.....you might want to do some reading on some of the research about successful people who have been school drop-outs......education is NO guarantee of success......and I would have thought it was educated people who have managed to lead the world economy into a GFC? Key is an educated man yet he was backing dairy - get my drift !!!
I think I mentioned cows and paying too much for them also. I don't feel sorry for anyone who paid top dollar for an asset with borrowed money. I suppose you expect the tax payer to bail them out. People got ahead of themselves. The pay out was high and land and cows got expensive. Why rush in and buy then. Like those who bought houses in Auckland last year. The clever ones sold to the suckers who were willing to buy over priced assets.
I have a nearly empty farm because I think the beef market is top heavy. If I decide to buy I just have to bite the bullet, it's going to cost me $1200 a head. It's the market price, just like dairy farmers found, confronted with new conversions and high demand,prices for cows were high.
Even conservative farmers like me still have to meet the market, I try to be counter cyclical but still get drawn into the world of the overly optimistic, those livestock finance companies make buying so easy for those, who in the past had to go cap in hand to a bank manager.
Then again, I had the luck of timing my age well, I got into land relatively cheaply and livestock that had better margins than now.
Timing is everything.
You are looking at this issue with the benefit of hindsight....many of the farmers concerned have made decisions based on the data that was available at the time they did their transactions......and many people were talking the dairy industry up......if you're going to play blame games how about holding those that talked the industry higher to account......was it reckless guidance? Did any of these mouth pieces have skin in the game? Or did they get some reward from their advice?
Why blame some poor individuals for getting into the industry and following their passion when they had to also compete against Government Agency corporates who helped drive up prices of land and cows etc? The price of Government and its Agencies reflects on the price of land and stock etc so how much of that borrowed money gets injected back to politicians and bureaucrats?
Should not be too long before ANZ starts asking questions of Shanghai Pengxin . Once the land value/ bio assets start being revalued down its debt ratios will start to look decidedly problematic. Even' private 'companies have financial limits. Micheal Fay may be able to pick up a distressed asset.
The other day when rbnz was talking about worst case scenario in regards to dairy - is that what we got now - or is this slightly worser ? He also forgot to mention el nino weather pattern - i wonder how thats shaping up - maybe he will get his currency drop after all.
If milk is cheaper for the local market due to over production - thats kinda not an inflationary pressure either - kinda an example of where we maybe heading........ maybe we should prey and hope gas go's up - in regards to headline inflation.
Get real , there is not a snowball's chance in hell of retail milk prices dropping in NZ ........ we have a price-fixing cartel that if it existed in another country , would see the perpetrators jailed in terms of price -rigging legislation , anti-trust and anti-monopoly laws
This guy had some decent feed costs and I think they are still high.
http://www.newstalkzb.co.nz/news/business/unexpected-drop-in-global-dai…?
Sorry to disappoint , but Anchor Milk at Pak n Save Albany has not come down by a single cent over the period you cite in your post .
Our milk was more expensive per litre in 7 out of 10 countries surveyed, the only three more expensive were Hong Kong , Tokyo and Taipei , none of which had many cows at all when I last checked .
You referred to milk, not a brand. People choose to buy a brand. Some on this site have said they buy Lewis Road and are happy to pay the premium. If you want cheaper milk, buy store branded milk - or Dairy Dale - the 'budget' Fonterra brand from service stations. You are choosing to pay more for your milk Boatman.
“While we obviously would prefer to retain all of our staff, for those who are interested in moving on we will be providing assistance in their search for new roles outside of the business,” says Mr Leslie.
.
Well you'd wonder what form that assistance will take..? extra exit signs in the building I'd imagine.
For those who missed it a must read from the past week is this........http://www.imf.org/external/np/speeches/2016/030816.htm as it seems to be playing out verbatim in the days since........
Russia would of filled the dairy gap but our div of a PM decided he better not cross our U.S. rulers. The opportunities were there but like sheep we followed the worlds western idiots and hypocrisy by supporting sanctions against a huge Russian market place where we may of had the entire thing for ourselves if played right
Usual blather by ludicrously uninformed common taters, (for the most part, some honourable exceptions...), on this here thread.
Let's segment the allegedly monolithic Dairy Industry along three axes: the number of possible 'dairy farm configurations' will be the number of possibilities on each axis, multiplied together....
Axis#1 - the DairyNZ Production categorisation:
http://www.dairynz.co.nz/farm/farm-systems/the-5-production-systems
- System 1 - All grass self contained, all stock on the dairy platform. No feed is imported. No supplement fed to the herd except supplement harvested off the effective milking area and dry cows are not grazed off the effective milking area.
- System 2 - Feed imported, either supplement or grazing off, fed to dry cows. Approx 4 - 14% of total feed is imported. Large variation in % as in high rainfall areas and cold climates such as Southland, most of the cows are wintered off.
- System 3 - Feed imported to extend lactation (typically autumn feed) and for dry cows. Approx 10-20% of total feed is imported. Westland - feed to extend lactation may be imported in spring rather than autumn.
- System 4 - Feed imported and used at both ends of lactation and for dry cows. Approx 20 - 30% of total feed is imported onto the farm.
- System 5 - Imported feed used all year, throughout lactation & for dry cows. Approx 25 - 40% (but can be up to 55%) of total feed is imported.
*Note: Farms feeding 1-2kg of meal or grain per cow per day for most of the season will best fit in System 3
Axis #2 - Climactic considerations: primarily latitude/altitude and rainfall or irrigation availability. Let's wildly generalise and say there are four latitude/altitude bands, and four rainfall/irrigation bands. Latitude/altitude influences GDD and thus pasture production, rainfall/irrigation are obvious substitutes (Like, no irrigation needed on West Coast, South Island, for the most part). Say 16 possible mixes here.
Axis #3: extent and age of debt, plus WACC (which influences interest expense rather directly). Another SWAG here: 10 bands.
Multiply 'em together (takes off socks, doubles compute power) that's ...um...800 possible configurations.
Now, folks, in yer comments, try to locate your example along all three axes, so those of us who have some dim idea of we are talking about, can judge and respond accordingly.
in some reports fewer possible configurations are used:
http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Bulletin…
less so, Fran adds to the discussion this morning, who'd thought.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=116…
Spot on. As much as we might celebrate our no8 wire innovations driven by being a small remote country having to figure out solutions ourselves.....the downside is definitely being such a small economy that monopolies really are everywhere. Many service areas too small to support truly competing businesses in the same space. So they get big cumbersome and lazy. Example, I know a guy who got in early with Telecom marketing when Clear came along. Said it was the best possible thing to happen to Telecom as they simply didn't have a clue about the market they were in, the services they did and could provide, what their customers really wanted. But please read that in context of way back when :)
I think we have been here before.
Sixty years ago , when our overlords, the british, said they want more lamb, we invented the blast freezing process and sent them meat that ate like leather. Took 30 years to figure that out.
Our new masters say they quite like our cheese so we build milk dryers and produce vast amounts of milk commodities.
What do we need to learn?
We run deficit's and our powers that be thought we could export our way into surplus and wealth with a bit of central planned encouragement.
China, South Korea, Germany and Japan run surpluses and reap the rewards of growth, jobs and prosperity, while countries in deficit get cheap goods, deflationary pressures,unemployment and stagnation.
Why would China or Japan invest here? Most goods here are either already made in China/Japan or could be made cheaper offshore and seen as an opportunity. All we had was our climate and soils so we went the only route we could see, increased agricultural production.
Unfortunately we also went down the route of increased government spending, high wages for the elite and entitled, high taxation, poor productivity, and very high debt levels. Debt often mal-invested in asset bubbles and high risk commodity speculation.
Which lead us to where we are today, up the creek.
A good comment Andrew,
I suspect as a society we rather like central planning, the state as a provider, possibly expressed by our early adoption of the social welfare system.
But our origins are a small british colony struggling for the first hundred years and its hard to get off the back foot.
While China lifts millions out of poverty 49 million Americans rely on food stamps but will Chinas export model continue to deliver the goods?
http://www.zerohedge.com/news/2016-03-15/china-freight-index-collapses-…
Still a wealthy country.
https://en.wikipedia.org/wiki/National_wealth
And even a happy one
http://www.oecdbetterlifeindex.org/countries/new-zealand/
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