All posts by Joelene Prier

Source: Stuff

Bill English says China is sitting on “mountains” of excess dairy product, part of a global glut, but he remains confident prices will recover this year.

Dairy prices hit a six year low in July amid global oversupply, sending the kiwi dollar plunging to the lowest level in six years against the US dollar.

The Finance Minister, fresh from a week long trip to China, New Zealand’s largest export market, said that there was a picture of an international glut of dairy products which would keep prices lower for some months to come.

In recent weeks the US Department of Agriculture had highlighted an increase in stocks of dairy prices being stored in China.

“It appears there’s been almost literally a mountain of milk powder in warehouses around China, more than people thought so it might take a bit longer to work through,” English said.

“The way it’s been described to me, there’s been a perfect storm of excess milk supply, influenced by events in Russia, Europe, in China, in New Zealand, Australia and that’s led to these prices which I think everyone regards, everyone believes are too low for the health of the dairy industry, whether it’s here, in China or in Europe, but it is going to take some time for the prices to pick up.”

English remained confident that there would be a recovery in dairy prices some time in 2015.

“I don’t think there’s much doubt that they’re going to pick up, it’s just a matter of when and how fast.”

Estimates ranged from picking up in a few months to remaining flat until Christmas, English said.

“I haven’t seen any estimate that it would take years to clear up.”

Despite the fall in prices English said there were no plans for the Government to provide direct financial support for farmers, or active steps to diversify the economy, preferring to leave this to the market.

“The market’s sending some pretty strong signals. It would be hard for the government to do much better I would have thought,” English said.

“When you get high price products it’s not surprising that people produce a few more of those products but I think the dairy industry’s been pretty realistic that the very high prices that they were getting weren’t going to last.”

Labour finance spokesman Grant Robertson said English’s stance was “recklessly complacent” and steps should be taken to reduce the economy’s reliance on dairy.

“The Government’s had six and a half years to diversify the economy and they’ve failed to do it. They were warned that there would be a global dairy glut at least 18 months ago and they failed to respond to that,” Robertson said.

“This is not just about the farmers themselves who are doing it tough, it’s about the regional towns and communities around those farmers who are also looking at billions of dollars gone from their economy.”

– Stuff

Source: Stuff

World dairy prices are in the doldrums, Kiwi farmers are experiencing the tightest cashflow in 25 years and Fonterra has just cut more than 500 jobs, but Colin Glass, chief executive of Dairy Holdings, the country’s largest dairy enterprise, has an air of calm about him.

“We are just hunkering down and making sure our costs of production are in order,” he says.

“Dairy Holdings operates on a simple business model that generates cash year in, year out and has withstood risk. It revolves around efficient irrigation systems on-farm and managing nutrient limits; that way farms grow the feed themselves, winter cows and maintain a competitive advantage.”

But he knows times are going to get tougher before they get better.

Fonterra’s initial forecast for 2015/16 was $5.25 per kilogram of milk solids (KgMS), up $0.85 on the previous season. However, with the Global Dairy Trade (GDT) down 34 per cent since March, the forecast is looking more and more challenging.

“There will be little or no cash coming to any dairy farmer between now and October,” Glass says. “This means we will be lucky to get $4 in cash this upcoming season and most of that comes around Christmas. Most dairy farms have been enjoying cashflow from the previous season, so it’s only just starting to bite.”

The industry went through a period of high international milk prices well in excess of $5500/tonne for milk powder, and all around the world, regardless of system, dairy farmers made money, he says.

“On the back of that there was significant increase in production. The United States (US) is growing at 2.5-3.5 per cent per annum despite a terrible drought in the west – it’s going gangbusters. And US farmers have margin protection insurance in place, so they can withstand prices falling. This has become a game-changer. New Zealand’s competition is the US. So far all US production has been sucked up internally, but this will change.”

“One third of New Zealand’s milk goes to China, which is struggling. Until we see it re-enter the market, things will be tight. It’s been buying a low volume of milk powder the past 12 months so there has been a massive reduction in dairy trade prices. There remains product out there internationally that has to be cleared.”

Dairy Holdings Limited (Dairy Holdings) is a New Zealand-registered company with 100 per cent of its farming assets in the South Island. It is managed through a head office in Timaru.

The company began in 2001 with the purchase of two major South Island corporate farming entities: Tasman Agriculture and Dairy Brands Ltd. Since then the company has mainly operated in Canterbury and North Otago, with a further eight dairy units in West Otago and Southland and five spread between Springs Junction and Murchison.

The company owns 58 dairy farms (13797ha), 53 of which supply Fonterra and five the Westland Co-operative Dairy Company. Spread across the farms are 46,000 cows of which 32,000 are owned by the company and the balance supplied by sharemilkers and contract milkers.

The company also owns four large-scale heifer grazing blocks, and rears and grows out approximately 7500 heifer calves and 8000 in-calf heifers each year. It owns or leases 14 grazing and dry stock blocks used for carry-over cows and winter grazing.

Three operations managers and five supervisors oversee the day-to-day operations, each being responsible for approximately 10 farms. All farms are budgeted to produce 16m kg/MS in the season ending May 31, 2016.

Career progression is a big part of the Dairy Holdings philosophy. By changing the model, the company enables people to build stock and grow on the farm they are working on. This encourages capability and herd quality, Glass says.

“Around 2010, with the South Canterbury Finance troubles, we stopped growing, but the capabilities of our staff moved ahead. It was as if the industry had been growing so fast, people were being promoted beyond their capability. This was a huge insight for Dairy Holdings.”

In 2008/09 dairy prices “tanked”, but the subsequent year became one of the company’s strongest. Dairy Holdings went into the year expecting the worst so had its cost structures under control. But in contrast with this current year, interest rates had halved, and urea prices peaked at $1111 per tonne. Then the dollar went from 80c to 50c and urea prices dropped to $600.

“Dairy Holdings didn’t have to change anything on-farm, so long as it stuck to its knitting,” Glass says.

“This time round, there are no significant price reductions on the horizon. The changes towards resilience are a lot tougher. Our shareholders are all Kiwi farming families with a long-term view of farming and they recognise the need to put systems in place. If a business is profitable, it’s amazing what ups and downs it can deal with.”

Dairy Holdings has not jumped on the dairy barn bandwagon but taken a long-term view of where New Zealand’s competitive advantage is. This has involved investing heavily up and down the value chain eg. Ravensdown, Fonterra and its support blocks.

Its young stock are on grazing units in Mid-Canterbury and the company is trying to nail down its wintering ground. Not wanting to be reliant on the market, its aim is to be as self-contained as possible. Over the past decade, most of the appreciation in farm cost of production has been in feed and grazing.

“This year’s early autumn period was dry and winter feed crops were struggling,” Glass says. “But because we had wintering blocks geographically spread, we were able to winter the same number of cows as last winter, despite growing conditions being quite different. We maintained costs and kept control; it was our way of weathering the storm.”

New Zealand’s competitiveness in the world scene has changed quite markedly, he says. Today poses difficult times for operators who don’t have costs under control and the farms that buy the greatest quantity of feed are the ones under the most pressure. The farms that harvest the most pasture per hectare are the most productive.

“We have chosen the pasture approach; we want simple systems in place that can replicate our performance year after year. That for us is the key; why New Zealand has been so strong in dairy. It’s because of the work in the 1950s, 60s and 70s by our scientists, who led the world in pasture research, and to whom we are indebted.”

Many dairy businesses are just milking platforms, he says, and value can get captured elsewhere. Winter grazing is as high as $28-$30 per head per week and these costs are rising at a greater rate than the milk price. This past season they haven’t softened due to supply and demand from the large number of dairy conversions.

“This is not necessarily bad,” Glass says. “It shows how big dairy is in Canterbury and why Dairy Holdings needed to invest in support blocks to take control.”

“We look at New Zealand’s strength and in our view the country is more removed from the market than anyone else. Our strength and reason for being is to grow pasture, and have our cows outside for 12 months of the year. Any time you introduce a machine between the cow and her feed, you introduce costs, which diminish your competitiveness on the international stage. Nationally, by introducing more and supplementary feed, we are doing more production but are we any better off? This is the question everyone needs to ask.”

Source: Stuff

A mixed bag of results from the GlobalDairyTrade auction overnight saw dairy prices fall for the seventh consecutive time.

The price index fell by 1.3 per cent and the average sale price dropped 0.1 per cent to US$2409 ($3447) a tonne.

Butter, butter milk powder and cheddar increased while both skim and whole milk powders fell.

Anhydrous milk fat suffered the biggest fall, dropping 8.9 per cent.

Analysis firm AgriHQ decreased its 2015-16 Farmgate Milk Price by 14c to $5.50 per kilogram of milksolids following the auction.

Waikato Federated Farmers president Chris Lewis said international traders and buyers would have to get the message soon that New Zealand’s dairy production would not be dramatically increasing in the new season.

“You have to wonder when the worm will change direction.”

People in the food business needed to buy dairy ingredients to make a dollar and Lewis predicted that some time in the next few months they would “have to put a stake in the sand” and start buying again.

He also took solace because this latest fall was the smallest of all of the seven drops that had occurred so far. The Northern Hemisphere was starting to hit its peak production and he expected to see a more positive result in the next few auctions when that milk flow started to drop off.

Fonterra offered just 10,000 tonnes of whole milk powder, the least amount made available this year to date.

ASB rural economist Nathan Penny said this was probably the biggest let down in this auction.

“We were expecting a bit more of a bounce but we didn’t get that so that’s sort of slightly disappointing.

“Traditionally this auction is the smallest auction of the year. It’s getting down to the point where production is lowest so you’d expect when production is low at this time of year, that is reflected in auctions and you’d get a bit of seasonal movement in prices.”

Penny said the end of the season has surprised markets somewhat with a stronger than expected performance.

“We had the drought but that was very short and sharp and over March, April, May production recovered and increased versus last season. This has meant there has been a late flush and markets hadn’t factored that in,” he said.

ASB predicted the current season of milk to last another month or two, after which dairy prices should start to lift.

The last time prices lifted at the auction was March 3, 2015, when the index crept up 1.1 per cent.

It also predicts production in the new season to be lower than the same time last season.

“We do need prices to lift so if we’re keeping a lid on production this new season, prices will lift and that should help farmer incomes more than if they would increase production,” Penny said.

The quantity of whole milk powder is expected to rise from July, which AgriHQ dairy analyst Susan Kilsby said would make it harder for dairy prices to lift.

“It will become harder for prices to recover as the volume of milk powder on offer increases as the new dairy season progresses,” she said.

A drop in the New Zealand dollar last week following the official cash rate cut was good news for farmers.

“A weaker New Zealand dollar is welcomed by our dairy farmers as this improves returns at the farmgate and helps to reduce the impact of the very low milk prices,” Kilsby said.

The kiwi currency remained stable overnight, at US69.91c and A90.27c on Wednesday morning.

It was trading at US69.96c and A90.11c late Tuesday afternoon.

Source: Stuff

Another Chinese dairy factory is setting up shop in Waikato and taking milk straight from the farm – at a time when our largest co-operative appears vulnerable.

Hong Kong based company He Run International Investment Ltd has announced it will build a $70-$80 million dairy factory in Otorohanga that will produce 25,000 tonnes of infant formula a year as well as specialty products like cheese.

Kiwi minority shareholder in the factory David Carey says farmers will be able to supply from 2016 when it kicks off production.

The price farmers will get for their milk will be “competitive” he says, although he added that He Run “did not want to be seen to be competing” with other dairy companies in the region.

“The industry standards for New Zealand are much, much higher than other countries, and that’s why [farmers] are getting paid a premium for [their milk],” Carey says.

He adds that “the [Chinese] investors are tied to a huge chain of supermarkets, and they’ve got their own brand but they do want a very, very good supply of New Zealand dairy products”.

While farmers are signing up to new milk contracts now, He Run had been talking to suppliers for some time, and Carey confirmed it already had a line up of farmers wanting to provide milk.

“People have known for some time and already we’ve been approached by numerous farmers saying ‘hey, when you get going, can you please contact us?'” Carey says.

The factory will be the third Chinese-owned operation announced in the Waikato in as many years, with Waikato District’s $212m Yashili infant formula plant ready to kick off production in October, and Allied Faxi Food Company having just announced the contractors for its $10m ice-cream and frozen cream factory in Hauraki District.

And it’s unlikely to be the last investment of its kind in the area.

Hauraki District Mayor John Tregidga travels regularly to China, and says there is “absolutely” hot interest in New Zealand.

“There is definitely a lot of interest from our contacts in China at looking at further investment in New Zealand, and not just Hauraki, right round New Zealand.

“We’re talking to government agencies in Beijing…I do believe that there are other investment opportunties that they are definitely looking at.”

He says he is “quite confident” Kiwis will soon see more investments by Chinese players here.

His fellow Mayor in Waikato District, Allan Sanson, says he is also aware of other Chinese investors checking out the Waikato.

New Zealand Trade and Enterprise general manager of capital Quentin Quin says in the last five years “the China New Zealand relationship has come alive”. Over the past two years, around 90 business visits – almost one delegation a week- had passed through the country from China that it was involved in.

More dairy factories could provide a challenge to Fonterra if – like He Run – they chose to head straight to farmers for supply.

Already the co-operative’s suppliers are feeling the pain after losing money on shares, and for many of them, the payout this year. While Fonterra says 87 per cent of the country’s dairy farmers are still on board, companies such as Open Country Dairy and Tatua have waiting lists of farmers wanting to join them.

The newest producer has also arrived in town just as Fonterra’s special status under the Dairy Industry Restructuring Act is under scrutiny. Should its proportion of New Zealand’s millk supply fall under 80 per cent, rules governing its operation will no longer apply – potentially thrusting the New Zealand’s dairy industry through its biggest change since the co-operative was formed.

Attempts to contact Fonterra chairman John Wilson were unsuccessful.

Waikato University’s Professor of Agribusiness Jacqueline Rowarth – herself a Fonterra sharesholder – says the new factory marks a significant moment for the New Zealand dairy industry.

It will spark fierce debate on whether Fonterra should be bound by special rules, which saw “the guts of it hucked out” by competitors who were free to operate as they wished.

Rowarth says because of that, there is “increasing a feeling that actually Fonterra should let it [supply] go to below 80 per cent and then they would lose quite a lot of their restrictions”.

“That might be overall a better thing for the country,” she says.

However, it would also likely mean farmers a good distance away from Fonterra factories might have to start paying for milk pick up, and would change the way the co-operative worked, she says.

All three factory builds also follow several food scandals involving Fonterra, including a tainted milk scandal in 2008 in which six Chinese infants died, a scare over lethal bacteria poisoning in 2013, and a 1080 poisoning scare earlier this year.

He Run has confirmed the food scares are partly behind the new factory in New Zealand.

Otorohanga quick facts

Hoi Fung Holdings Limited 70 per cent owner of He Run International Investment

David Carey, Russell Bayley and Hamish Putt 30 per cent owners

$70-$80 million build

Employes 50 people

Produces 25,000 tonnes per year

Initially 20 per cent of output will be organic

Exported into eight countries, and New Zealand

Build prompted by food scares.

Source: Stuff

A Fonterra shareholder has encouraged his fellow co-op farmers to remain loyal to their local, as Chinese investors throw more options on the dairy table.

Hong Kong-based company He Run International Investment is the major shareholder in a new dairy factory planned to start taking shape in Otorohanga in August, and is ensuring “competitive” rates for suppliers.

Otorohanga dairy farmer Bruce Collinson-Smith has been a Fonterra shareholder “forever” and said the co-operative was an asset that needed to be guarded.

“We can proudly say it’s our company and that’s the thing about it. We’re shareholders and it’s ours.”

Collinson-Smith said he hoped local suppliers would remain loyal to Fonterra, despite the drop in share values and a disappointing payout.

“It was just 12 months ago we had a record payout year, and it’s amazing how people can change attitudes in a year.

He admitted the new options may look tempting for farmers, but said there were “so many unknowns” with a new, offshore company.

“I’m really quite gobsmacked at some of the attitudes and short-sightedness of it, some people saying ‘I’m threatening to leave’, and I can’t understand it all.

“Sure [Fonterra] haven’t performed and with this organic milk factory, it’s an opportunity and people are down … but for rural New Zealand this is an employment opportunity, so it’s good for a town … but it will be disappointing for Fonterra.

“Sometimes it doesn’t perform but you hope it turns around and does perform.”

He didn’t like the fact unknown, offshore names were behind the company, and questioned why they chose Otorohanga.

“Who actually is behind the company, I don’t know who’s backing it and what’s their reason for it going down in Otorohanga. I don’t know of any organic farmers in Otorohanga.”

Kiwi minority shareholder David Carey said Otorohanga was chosen because of its water supply.

“We struggled to find any council which had the resources which Otorohanga had … water, gas electricity, the ability to take effluent in times of rain… without that and without the backing of the council we couldn’t do this operation.”

Waikato District mayor Allan Sanson said Waikato was the “post card” for dairying around the world which made it a natural landing pad for companies like these.

Sanson wasn’t worried about any competition to Fonterra, saying the Kiwi co-operative is geared to producing “faster” commodities like butter and cheese, which could be made quickly when billions of litres of milk were pumping through its factories.

He also said he the fact that the majority of profits would be heading offshore was no different to what was already happening at New Zealand banks.

“People need to get real about this.

“I don’t like to see profits go offshore either but at the end of the day the profit to the country is around the value added the employment and what it actually brings to the region and the country. ”

Hauraki District Mayor John Tregidga said the economic benefit of the factories was significant for small communities, and the Government had encouraged overseas investment.

“It’s a real good – not only economic boost, but also a confidence boost for our communities.”

“It not only helps job creation, but house prices, there is just a big flow on effect. It’s not only the increase in commercial rates that we’re getting from this but also anyone that’s moving into the area.”

Tregidga said development had just begun on 50 property sections in Ngatea, which was triggered by the new factory, and the factory would require a wastewater plant.

Tregidga said while more infrastructure as required, that could be managed.

“At the end of the day they’re buying milk off our local suppliers [such as Fonterra and Open Country].

“It’s big on export earning…where is the disadvantage? I don’t get it.

“The NZ government has been encouraging overseas investment and I’m absolutely supportive of it.”

Source: Stuff

It will take at least two years for Andrew McGiven’s dairy farm business to recover from the current slump in dairy prices.

The sharp fall in prices had eroded any profit made from last year’s record payout, the Waikato farmer told about 30 farmers at a field day on his farm on Wednesday.

McGiven’s projected income had halved from $1,809,786 ($8/kg MS) in 2013-14 to $967,000 (4.20/kg MS) for 2015-16. The drop was due to the milk price fall, his decision to employ contract milker Graham Wallace and the time lag that occurred for supplementary feed costs to fall in line with the payout drop.

McGiven’s 135ha business is a farm used as part of DairyNZ’s tactics for tight times campaign to provide advice on coping with the low payout.

He would hit his $300,000 overdraft limit on June 1. It had been on a downward spiral since January-February of this season.

“It’s been a sudden and sharp drop.”

He has also shifted to a winter milking system, which compounded the debt situation.

Adding to the pressure was the latest GlobalDairyTrade result, which saw international dairy prices fall 2.2 per cent. The auction is the final sale before Fonterra updates its forecast for the 2014-15 season and announces its opening forecast for the 2015-16 season on May 27.

Fonterra will also reveal its advanced rate. Once that is known, McGiven said he would then add those rates into the budget and sit down with his bank manager to determine what their requirements would be.

He planned to take a large part of his overdraft and put it into a term debt. He also ceased principle debt payments three months ago and is only looking to pay off interest.

“Essentially it’s going to set us back two years in our refinancing plan and any profit we made last year is probably going to be eaten up this year and it’s going to be at least a two-year turnaround.

“The banks have indicated they are happy enough with the plan going forward and are going to back us, which is good to hear. We’ll just keep plugging forward and hope for those GDT prices to lift. That’s what’s going to make or break us in the end.”

DairyNZ North Waikato regional leader Phil Irvine told farmers to go through each itemised cost in the budget to work out if anything can be reduced.

He also urged farmers not to forget to review their drawings, or personal expenses.

“Put aside $1000 a week to live on and then decide what to do after that.”

Most of the farmers attending the field day said they would be in a negative or a break even cash deficit for this season. One was still hopeful the forecast would pick up this season.

Farmers had to go “back to basics” and look to grow as much grass as possible to feed their cows because it was the cheapest feed source. If the El Nino weather pattern was correct, farmers had to be prepared and either de-stock or switch to once a day milking, another said.

Others also predicted it would be a two year turnaround for their farms to recover, provided the milk payout lifted.

Irvine said the next few months over spring would be tough because of the fall in retrospective payments. These are payments from milk that is produced this season but is paid to farmers over the winter and early spring.

A Waikato farm producing 100,000kg milk solids would only receive about 18-19c per kilogram of milk solids in these payments from Fonterra.

Last season those payments came in at about $1.90/kg MS, he said.

“That’s why the bank balance is going to be pretty lean this winter and spring,” he said.

He said the average Waikato farmer milking 330 cows would have a cash deficit of $46,834. For a 50:50 sharemilker milking 337 cows, that deficit came in at $44,845.

Source: Stuff

OPINION: It seems to me that Fonterra cannot pay its suppliers a decent milk price two seasons in a row.

Is this stating the obvious? Last season the company was paying its farmers a whopping $8.30/kg milk solids, then making it into value added products that less customers could afford while pinching its own value add profit margins in the meantime.

Are they still trying to sell these same expensively made value added products on a market overflowing with surplus milk pushing the prices down further? Is that why, notwithstanding the occurrence of some weird international economic event, two consecutive years of a high milk price is almost mutually exclusive?

Is that why the current milk price and dividend are so low? And does that mean there is a chance it might flip back to good later this year?

This is probably over simplified, but I am racking my brains to come up with an effective strategy to get through next season.

Do I beg the bank for a handout to get me through the next few months with no cash flow, but with all the expenses the beginning of a new dairy season brings? Do I buy in some supplementary feed and hope like mad there is enough money in the milk price to at least break even in a quest to guarantee the cows a decent start to the season?

Or do I impoverish myself and see if I can defer some lease payments until I have a cashflow and tighten my belt so hard, which will mean not fixing and registering my vehicles that are both off the road, not getting the milking machines checked or replacing any rubberware?

Well I could live with that, but the cops and the Fonterra shed inspector probably can’t. Of course I couldn’t afford any supplementary feed either and start my cows off on grass only, which will set the stage for the rest of the season and expose my cows condition and reproductive results to the vagaries of the weather.

It’s a hard choice but one that will probably be made for me by the bank manager who I am waiting to hear back from.

Either of those strategies could be the way to go. The latter will be tough on me and my daughter and the cows and leave me with egg on my face should payments prove to be better than expected.

All the belt tightening will be for nought, as being able to afford supplementary feed later in the season is a waste of time if your production levels are low, reflecting the low input (either by too many cows not getting enough feed or, if I cull, not enough cows to maintain feed quality and no resources to do it mechanically.)

Or if I go for the former, riskier option and invest money I don’t have in preparing for the season in a positive manner and then the milk price doesn’t improve or falls lower then financially, I would have nowhere to go as unsurprisingly, banks are not an endless supply of money.

Business analysts are saying that the low milk price is great for sorting the men out from the boys and that a lot of monkeys will be leaving the ring and that is all well and good if they are European monkeys. It is not so good if they are New Zealand monkeys.

To be honest I am feeling a bit ape-like myself as my business is not robust and as a leasee rather than a land-owner my assets – cows and crappy machinery – are not seen by the banks as very good for leverage.

So that is what’s keeping me awake these nights.