By Bernard Hickey
Fonterra Chief Executive Theo Spierings remains confident in the long term outlook for dairy prices despite the extended slump in dairy prices over the last two years.
Spierings said Fonterra expected global demand for milk to grow around 2-3% per year and that domestic supply constraints in Europe and the United States would mean that would have to be supplied from the globally traded market for milk products, which Fonterra dominated.
He referred to a chart (see below) where that 2-3% global demand growth translated into a 25 billion litre increase in demand for globally traded milk products to 91 billion litres by 2020, whereas New Zealand produced 21 billion litres currently and was expected to increase that to 25 billion litres by 2020.
"That picture is not the situation right now. Right now we're in an imbalance. That's why we have the NZ$3.90/kg," Spierings told a news conference announcing Fonterra's first half results.
Spierings said European producers would not be able to supply that long-term increase in demand, and that Fonterra was also seeing an increase in US demand that would prevent US producers from being able to export into the globally traded pool.
"This is why we say dairy has a good future because that big bucket is growing at 2-3%," he said, referring to annual growth of 8 billion to 12 billion litres of global dairy demand each year.
"We are saying that that would be traded through the globally traded arena and it will be extremely difficult to get that growth on the supply side because Europe is constrained," Spierings said.
"Yes the quota is off, but there's environmental limits -- they're running into that right now -- and the US can do quite a bit, but we see very strong domestic growth in the US," he said.
"The US has been flat or declining in domestic milk consumption, (but) the whole scene in the US is shifting away from soy and vegetable and back into dairy. Dairy has a very big tick in the US," he said, pointing to a recent decision by McDonalds to move back to using dairy supplies.
"So the US will see 2-3% domestic growth, so they won't be exporting," he said.
Challenged again on whether European dairy farmers could repeat their 3.2 billion litre production increase from this year to satisfy that demand growth, Spierings said European farmers were hitting limits.
"They're running into limits on herds and environmental constraints. In my own country there is phosphate limits being introduced right now which will have an impact. So they're running into some limitations," he said.
NZ 'still lower cost'
Chairman John Wilson also said New Zealand dairy farmers were still lower cost producers than those of Europe and the United States.
"Nothing has changed there. Our farmers are still the most competitive in the world now," he said.
"There's always a lag," he said, referring to the reaction of producers to a quick fall in prices. He said the lag was usually longer in Europe and the United States, where 85-90% of production was for domestic markets, whereas the export share in New Zealand was 95%.
"We are seeing that start to kick in now. It's been drawn out. Out of the box events like the embargo from Russia, they had a big impact on extending that time," Wilson said.
He said Fonterra would announce its initial payout forecast for 2016/17 in May, but Fonterra was seeing signs that the supply and demand were returning to some sort of balance.
"We certainly believe that the global dairy market is not as imbalanced as the price would indicate, and we certainly believe that prices will start to pick up over the second half of this year. We can't name the date or the month, but we certainly believe that will occur because the fundamentals are very strong," he said.
"We've had some unusual events on both the supply and the demand side. We believe it will work itself through over the next 6-12 months."
Cash loan 'unique' to 2015
Earlier, Fonterra announced it expected to pay a dividend of 40c/share, increasing the cash payout to fully shared-up farmers to NZ$4.30/kg, but it said it had decided against extending a 50c/kg interest free loan that it ran for the first half of the 2015/16. Fonterra is bringing forward the final 20c dividend to May and August and the interim dividend of 20c would be paid in April.
Asked if Fonterra had the debt-raising capacity to do the cash loan again, Wilson said Fonterra had the balance sheet flexibility, but said the situation in early 2015/16 was unusual.
"That Co-op support loan was at a unique time -- 8-9 days into our financial year -- forecasting forward, it was our best approach we could take to provide a solution for our farmers," Wilson said.
"It's a different environment right now. We'll always look at what we can do in times of uncertainty. The most important thing we can do is ensure we've got a strong balance sheet," he said.
Pressed again on whether a repeat of the cash loan was possible, he said: "We look at these things from time to time. We cannot foresee what the situation is going to be months in advance."
Elsewhere, CFO Lukas Paravicini said Fonterra's change of payment terms to delay payment to as much as 60 days for 1,000 local suppliers had improved Fonterra's working capital by NZ$50-70 million.
Wilson said Fonterra was working harder to communicate with its suppliers, having sent out letters to those 1,000 suppliers in October last year notifying them of the payment term changes.
"We could have done a far better job of communicating with some of those suppliers," he said.
64 Comments
Theo reckons that the europeans can't increase production any further, but the Irish are confident they can still double their production.
https://www.agriland.ie/farming-news/potential-to-double-the-average-mi…
Christov the point is that our mate Theo says demand will increase and Europe can't increase their production to match, when most people in fact believe that European farmers can easily increase production further if demand increases.
Obviously someone is doing some wishful thinking and only time will tell who that is.
(Brussels, 15th March 2016) Yesterday in Brussels EU Ministers of Agriculture agreed on measures for the dairy market. On a positive note, decisions-makers finally understood that it is the European-wide overproduction that needs to be addressed. In order to do so, they want to use voluntary production cuts
http://www.europeanmilkboard.org/special-content/news/news-details/arti…
Exactly Christov. It doesn't look like the EU processing companies are doing any better than Fonterra in their returns to farmers.
Arla Foods has cut its its on-account milk price for April by 0.75p/l, the equivalent of 0.94c/L when converted to euro.
https://www.agriland.ie/farming-news/arla-uk-cuts-its-milk-price-for-ap…
and the added concern of whether or not the UK processors have the capacity to process the expected increases
https://www.agriland.ie/farming-news/britain-has-the-cows-to-produce-mo…
The Irish look like they have been thrown a curve ball by the UK and are reliant on currency downgrades to maintain prices
The UK remains a key market for Irish dairy exports accounting for almost one third of the total. A decline of 4% was recorded in the value of exports in 2015 at an estimated €960m.
Declines in cheese, SMP and WMP exports were offset somewhat by some increase in butter and specialised nutritional dairy powder exports. The value of trade was helped by a more favourable euro/Sterling exchange rate.
https://www.agriland.ie/farming-news/farmer-anger-as-uk-government-advi…
and to support your statement Christov
Copa president Martin Merrild said ”Many farmers across Europe are facing the worst crisis since the early 1980s. The EU dairy and pig meat sectors are bleeding.”
The lost Russian export market alone was worth €5.1 billion
https://farmersweekly.co.nz/section/dairy/view/new-measure-to-help-eu-f…
Great logic isn't it.
I remember reading an NYT article a few years ago about Chilean fishermen who had overfished leading to a collapse in fish population. In an interview their answer to the fish population collapse was “We’ve got to fish harder before it’s all gone".
Same logic seems to apply to dairy production here in NZ. Prices are collapsing and stock is building. Theo "We've got to produce more milk to fix the oversupply". Comedy gold.
That comment from Theo just nails their contempt for this country's environment doesn't it. They are just vandals in my opinion who will do whatever it takes to make a buck. Screw our environment and our water, lets focus on the $$$.
Well no, I suggest everyone watch a really great Documentary called :Last call at the Oasis (2011) By no means out of date and becoming very relevant.
NZ is sitting on a massive gold mine and that is our abundance of fresh water, but it's a mine we are destroying every single year piece by piece and Fonterra are a massive part of the problem.
Someone once said "Wars in the 21st century will be over water".
Once your natural water supplies become so polluted that drinking,swimming etc become health hazards then all we have done is opened a massive door for the "privatization" of all our water. Corporations will soon get hold of municipal suppliers and treatment plants like they have in California ( our other home) and believe me water costs more than electricity there already.
NZ must wake up to this massive threat.
Nah, we've still got important issues to worry about like the flag design!
Next year National will probably initiate another 'democratic referendum' where we can vote on the colour of a minister's vehicle. The choice will be between "Black" or "Dark blue" and the vote will cost the country another $30 million.
Who owns the water in Australia? Depends where you live....
http://www.onlineopinion.com.au/view.asp?article=6112&page=1
Funny how the Europeans are saying completely the opposite to Fonterra.
According to them it is NZ that is limited in our production due to environmental factors.
They are predicting europe will take up any additional demand in world dairy trade, and that prices will remain low for a lot longer yet.
https://www.fginsight.com/news/significant-eu-milk-price-recovery-not-e…
Just how does Fonterra imagine that New Zealand environmental conditions can support this predicted volume growth? Surely, to any sane mind, at some point - if we are not there yet - every environmental indicator and their mounting costs to the nation must outweigh any gains in volume growth. Or is there no real environmental responsibility to be expected of this company?
And then again, it is astonishing that Fonterra's thinking, in this CEO presentation, appears to pay no attention to value creation. Merely metrics of volume growth. Or maybe Fonterra recognises that every step in desired volume growth (expansion and intensification, with concurrent increases in imported GE feed, palm kernel feed, factory dairy farming, etc) is another step to losing the premium grass-fed, natural value that premium consumers want. The impacts of this volume direction may well mean that the value option becomes ever further out of reach.
If we put volume above the environment, and volume above value, we are heading in a very sorry direction indeed - in every economic, social and environmental measure of well being..
So yeh, +20% volume by 4 years time. Where? The farm conversion push is already onto marginal lands yes? How? Are new irrigation schemes going to happen by then? By Whom? With the debt stress within the industry now alongside how many years of 'low' payout, who has the appetite to dip their toe in the water.....
I love this comment about European constraints..... "but there's environmental limits -- they're running into that right now..." --...Spierings must be blind if he thinks big dairy will continue to have carte blanche on the environment here to meet that growth...is the man so removed from public opinion he thinks dairying can continue to expand the way it has, unchecked to get to the end of this growth rainbow he speaks of?
He knows that our chief scientist Dr Key has his back. The environment can go to hell in a dairy cart.
http://www.listener.co.nz/commentary/john-keys-unhappy-week-at-the-bbc/
Did Spierings actually study Economics , or are his assertions wishful thinking ?
The marginal production from one more unit , ie one more cow in each European herd will lead to massive increased production with little addition to costs.
Poland , Estonia , Latvia and Lithuania are massive areas in the EU suited to dairy production
The reality is there is much space in Europe that is not farmed efficiently ( esp in Eastern Europe ) which is as suited to dairy as NZ is .
Its a real problem for us , especially in the short to medium term
A report by the European Commissions predicts a small average milk price increase next year, but as production looks set to remain high, significant recovery is not expected until 2021.
https://www.fginsight.com/news/significant-eu-milk-price-recovery-not-e…
I have a vague recollection that under the CAP (common agricultural policy) French farmers with 1 acre of land and milking 2 cows got enough subsidies to make a good living each year - (there were 1000's of those type of farming operations) - things don't seem to have changed too much
..I hate! I spent some years farming, loved it. Now a city person, my escape now is the back country.
I hate the dairy industry - not personally, but hate if for what is has done and will do to our beautuful counry. The Dairy industry should hang its head in shame and back off from polluting the crap out of our biggest resource.
@ skudiv
We actually do subsidise agriculture indirectly through the NZ taxpayer...we are just less open about it. We pay for the irrigation schemes, the unit we built to recieve sheep in Saudi are examples of hidden subsidies.
We will also pay the enviromental costs in the future. We will eventually also pay through any future drop in tourism as the world comes to realise we are not as clean and green as we portray ourselves.
Milk production in the United States is projected to increase in the years up to 2025. This is stated in the report ‘USDA Agricultural Projections to 2025’.
However, the long-term upward trend in output per cow continues. The authors of the report state that strong domestic and export demand for dairy products combined with only moderate gains in projected feed costs provide favourable returns to US dairy producers that also encourage a general expansion of milk cow numbers.
The main messages in the report:
Milk cow numbers are projected to decrease in 2016, remain about even through 2020, and then rise through the remainder of the projection period. Rising milk prices after 2018 and lower feed costs than in recent years give favourable returns to producers and provide economic incentives for this continued expansion.
US milk output per cow is projected to increase through the projection period, reflecting continued technological and genetic developments as well as efficiency gains resulting from consolidation in the sector.
Domestic demand grows at a strong pace, with commercial use of dairy products rising faster than the growth in US population over the next decade. Demand for cheese is expected to rise due to greater consumption of prepared foods and increased away-from home eating. Butter demand is also expected to grow, in part due to the phase out of transfats. A decline in per capita consumption of fluid milk products is expected to continue.
Commercial exports of US dairy products declined in 2015, mostly due to lower demand from China and greater competition from the EU as a result of the Russian trade ban. However, US exports are projected to recover and expand over the next decade, led by greater exports of products that are high in non-fat milk solids, such as non-fat dry milk. Exports are projected to reach record levels on both a milk-fat and a skim-solids basis. Production increases in other major dairy exporting countries are expected to lag growth in global import demand.
Nominal farm-level milk prices are projected to decline through 2018 as lower feed costs encourage increased production. Prices then rise faster than the general inflation rate over the remainder of the projection period, largely on the strength of export market gains.
http://www.dairyglobal.net/
That's what concerns me, other countries will increase production dramatically at any sign of a lift in prices.
That will of course keep prices in check and limit the upper level that they can reach.
The heady days of $8.40 are long gone, we have seen a structural change now so it is not hard to see why many commentators are saying sub $5 is the new normal.
That's true......sub $5 may well now be the new normal....retooling and restructuring to cope with that won't be a luxury many, already over extended farmers can manage.
The IMF have recently made direct reference to lower for longer commodity prices and promoted the idea of central bankers using .."where feasible" manipulating currency to ease the impact on producers.
Interestingly enough both ECB and RBNZ moved to trim within a week of the IMF statement.
Where feasible ? Geesus pass me the roulette pistol I feel a blank coming on
And so it would appear that Theo pushing for volume /value/ velocity becomes a.. no skin off my nose..... for Fonterra, but encourages producers /suppliers into oversupplying a global market already facing saturation problems and the reflected prices of that oversupply.
Fonterra's agenda is not necessarily in the best interests of all farmers /suppliers but does seek to use those suppliers to maximum advantage without guaranteeing satisfactory operating margins or indeed policies that would do more to achieve those margins.
Christov, they have a plan..
http://www.stuff.co.nz/business/78225580/fonterra-letter-tells-business…?
http://www.nzxfutures.com/dairy/quotes/wmp
3 down days in a row.
Well how much milk we can produce should be the lest of our worries, has anyone noticed this recent news article on the BBC website: -
A New Zealand businessman has been jailed for eight and a half years for threatening to spike baby milk formula with controversial pesticide 1080.
http://www.bbc.com/news/world-asia-35878645
Remember when Fonterra faced a food scare in 2013 when it said contaminated products that could cause botulism had been exported overseas.
It was later found to have been a false alarm, but it led to many countries blocking imports of those particular products. China lifted its ban in October 2014.
It is written...
......... not like we have to guess...
China's 13th Five-Year Plan includes a complete makeover for the country's agriculture. The plan intends to demolish walls between city and countryside and stop pillaging the environment, but it retains inherent contradictions that will ultimately cement the control of China's mandarins over the food supply.
China will allow imports to play a role in the food supply, but the stream of imports will be tightly controlled. The plan suggests setting up an agricultural trade adjustment mechanism--an element of plans going back to a "white paper" on grains 20 years ago. Food supplies will be ensured by allowing imports of commodities that are in short supply, and by expanding and improving the menu of supplying countries. Exports of commodities in which China has a comparative advantage will be expanded. China will set up overseas bases for producing, processing, and storing farm commodities, and officials will nurture internationally competitive multinational agribusiness enterprises. China will expand areas for international cooperation in agriculture and engage in multilateral cooperation in agricultural technology.
http://dimsums.blogspot.com.au/2016/03/five-year-plan-to-transform-agri…
Or
http://m.nzherald.co.nz/world/news/article.cfm?c_id=2&objectid=11612248…
And
"Creditors will come to retrieve their debts, and not just the banks," he said. "Your personal assets are frozen, and you will be sued. It is terrifying, so why don't these bosses simply run away?" Chinese bankers complain privately they are also being held personally responsible for recovering doubtful debts, with loan officers' passports taken away to keep them from fleeing.
http://af.reuters.com/article/commoditiesNews/idAFL4N16K065?sp=true
And the policy response is?
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