Fonterra drops payout, ups dividend

September 24, 2014

Fonterra has dropped its forecast payout for this season but increased the forecast dividend:

Fonterra Co-operative Group Limited today reduced its forecast Farmgate Milk Price for the 2014/15 season from $6.00 to $5.30 per kgMS, and increased and widened the estimated dividend range from 20-25 cents per share to 25-35 cents – amounting to a forecast Cash Payout of $5.55-$5.65 for the current season.

Chairman John Wilson said the lower forecast Farmgate Milk Price reflected continuing volatility, with the GlobalDairyTrade price index declining 6 per cent in the past two trading events.

“The market is currently influenced by strong milk production globally, the impact of Russia’s ban on the importation of dairy products, and the levels of inventory in China. Some relief has been provided by exchange rates, with the NZ dollar recently showing some signs of falling against the US dollar.

“Under the current market conditions, there is further downside risk.  However, the forecast reflects expectations that prices will increase in the medium term,” Mr Wilson said.

Chief Executive Theo Spierings said the estimated dividend range reflected the positive impact of a lower forecast Farmgate Milk Price on product margins but also significant volatility in commodity prices.

“A lower forecast Farmgate Milk Price reduces input costs in our consumer and foodservice businesses. In turn, we do expect to deliver increased returns as a result of a recovery in margins on our products.

“In addition, stream returns for Non-Reference Commodity Products such as cheese and casein are currently making a positive earnings contribution, but it is still very early in the financial year.

“With volatility in commodity prices, a wide range of outcomes are possible in relation to stream returns. The wider dividend range reflects this volatility, and at this stage of the financial year, it is not realistic to be able to accurately forecast the final result for the year within a narrower range.”

Mr Wilson said that the forecast Farmgate Milk Price remained reliant on increasing dairy prices in the medium term.

“The forecast Farmgate Milk Price is reduced based on current estimates of future pricing. There remains significant volatility in international dairy commodity prices and given this, this forecast is our best judgment at this time.

“As always, we recommend caution with regards to on-farm budgets in this environment of continuing uncertainty.”

The news wasn’t all bad. Fonterra confirmed a record payout for last season:

Fonterra Co-operative Group announced today a final Cash Payout of $8.50 for the 2014 year for a 100 percent share-backed farmer, comprising a Farmgate Milk Price of $8.40 per kgMS and a dividend of 10 cents per share.

Chairman John Wilson said that the Cash Payout to the Co-operative’s 10,500 farmer shareholders was the highest ever made since Fonterra’s formation in 2001.

“The Farmgate Milk Price on its own represents an injection of more than $13.3 billion to the New Zealand economy for the season.

“It is a strong result, reflecting the determination of our farmer shareholders to lift on-farm performance, matched within the business by a focus on driving revenue.

“Our farmers took advantage of good conditions to produce 1,584 million kgMS, eight percent more than last season, to make the most of the good prevailing prices early in the season.

“North Island volumes were up nine percent at 969 million kgMS, while the South Island delivered a seven per cent rise in volumes to 615 million kgMS.

“A very good spring saw our farmer shareholders achieve record milk production through an extended peak, stretching our production capacity for powders. This led to early impacts on stream returns from the less valuable products we were forced to make.”

Fonterra CEO Theo Spierings said the Co-operative had come through a very demanding year.

“We have continued to stay on track with our strategy, focusing on securing the best returns to our farmer shareholders.

“We achieved record revenue of $22.3 billion for the year, a direct result of the focus on achieving the highest possible revenue line that is good for the Farmgate Milk Price.

“Constrained margins in our foodservice and consumer businesses and on non-milk powder products were the knock-on effect, contributing to a 27 per cent rise to $19.8 billion in the cost of goods sold. However, we maintained our focus on efficiency and achieved a two per cent reduction of $46 million in our operating costs.

“Our higher cost of goods sold, along with higher interest and taxation, saw our net profit after tax decline by 76 per cent to $179 million.” . . .

The cut in this season’s forecast was expected and last season’s record payout will be some compensation.

However, the reduced payout will impact not just on farmers but the people and businesses who service and supply them and the wider economy.

When the price goes up there’s always calls from the left for farmers to subsidise consumers.

There won’t be a call to subsidise farmers now the price has gone down, nor would we want it.


Rural round-up

July 30, 2014

Speech to Red Meat Sector conference – Nathan Guy:

Good evening and thank you for the opportunity to address you all tonight.

Following some challenging years, there are strong indications of improved results for many companies in the sector this year.

This resilience is a reflection of the hard work of people throughout the red meat sector.

The meat and wool sectors make up 21 percent of total primary sector export revenue at an estimated export value of $8 billion for the year ending 30 June 2014, which is a record.

The recovery of dry stock numbers after last year’s drought and the productivity improvements need to be acknowledged.

In the face of forecast decreases in stock numbers these capabilities will be important assets for the future. . .

Growth in global milk pool ‘unusual,’ says Spierings, in cutting forecast - Jonathan Underhill:

(BusinessDesk) – The global market for dairy products have been in the unusual situation where most producers have been lifting supply, while demand weakened in China, Southeast Asia and the Middle East, says Fonterra Cooperative Group chief executive Theo Spierings.

The world’s biggest dairy exporter today cut its Farmgate Milk Price forecast for the 2014/2015 year to $6 a kilogram of milk solids from a previous forecast of $7 kgMS, reflecting a slide in global dairy prices, which touched their lowest levels since December 2012 in the latest GlobalDairyTrade auction. It flagged a dividend of 20 cents to 25 cents, up from last year’s 10 cent payment.

“All milk pools around the world showed significant growth – we see milk coming from everywhere,” Spierings said. “On the demand side, China is looking at pretty high inventories” although in-market sales “are still very, very strong in China.” Demand in Southeast Asia and the Middle East had dropped off faster than expected as rising prices were passed onto consumers, he said. . . .

Agri industry passion leads to new appointment – Rabobank:

With a clear passion for the agricultural industry and strong knowledge of the sector, Georgia Twomey is thrilled to be appointed as a commodity analyst in Rabobank’s Food & Agribusiness Research and Advisory team.

Based in Rabobank’s Australia/New Zealand head office in Sydney, Ms Twomey will oversee sugar, cotton and wool – three key sectors for Rabobank’s business in the region.

Ms Twomey says she has always loved working in the agricultural industry, particularly being raised with a farming background, growing up in Goulburn in southern New South Wales.

“I love the agricultural industry and believe the sector really holds the key to Australia’s future economic security,” she says. . .

More emphasis on microbes required in food safety -

Current concepts regarding food safety and security may be inadequate for fully addressing what is an increasingly complex issue. That’s according to Lincoln University Senior Lecturer in Food Microbiology, Dr Malik Hussain.

Dr Hussain has been invited as a representative of the University’s Centre for Food Research and Innovation to the Asian Food Safety and Security Association Conference to be held in Vietnam in August. He will also chair a workshop at the conference on risk assessment and management with regard to food safety.

Although the matter of food safety and security may sound simple enough, it is, in fact, a multi-dimensional and complicated issue, made all the more so from increasing pressures stemming from rapid population growth. . .

Steve Yung appointed as new Sealord CEO:

Sealord Group Ltd’s Board of Directors has appointed experienced food industry leader Steve Yung as the company’s next CEO.

Canadian born Yung has most recently been Managing Director of McCain Foods Australia/New Zealand and will take up his new role, based in Auckland on the 25th August 2014. He was a member of the global Senior Leadership Team at McCain.

Sealord Group Chairman Matanuku Mahuika said Yung has a strong set of skills that will help the company’s growth and development, particularly in the Australian market. . . .

Protecting your winter grazing business:

Both graziers and those sending animals for grazing have obligations under the NAIT programme to record the movements of animals from farm to farm. It is the grazier’s responsibility to record a NAIT movement from the grazing block to the home farm for animals that have been wintered on their property.

It’s also important that the person in charge of the animals at the receiving home farm confirm with NAIT when the cattle arrive back from grazing.

This can be done through movement related notification emails that include a direct link to the NAIT system, where animal movements can be confirmed or rejected in just a few clicks. Alternatively, you can contact NAIT on 0800 624 843. . . .

UK supermarket giant partners with New Zealand Ag-Tech company for major R&D collaboration:

British supermarket Sainsbury’s is teaming up with New Zealand’s Techion Group to run an international, cutting edge, technology project. The two-year international research & development project will roll out on-farm technology to effectively manage parasites increasing product quality and profits for farmers.

 J Sainsbury Plc, in conjunction withTechion Group Ltd, has announced Sainsbury’s will support the cost of implementing Techion’s technology, the FECPAK G2 system, both in New Zealand and the UK. The project team includes meat processors Alliance Group (NZ), Dunbia (UK) and Randall Parker Foods (UK).

Greg Mirams, Founder and Managing Director of the animal parasite diagnostics company, Techion, is at the centre of the project. He is confident it will have a significant impact on farmers’ profit and efficiency here and in the UK. . .  .


Fonterra drops payout to $6

July 29, 2014

Fonterra has announced its forecast payout for this season has dropped by a dollar:

Fonterra Co-operative Group Limited today reduced its forecast Farmgate Milk Price for the 2014/15 season from $7.00 to $6.00 per kgMS and announced an estimated dividend range of 20-25 cents per share – amounting to a Forecast Cash Payout of $6.20-$6.25 for the current season.

Chairman John Wilson said the lower forecast Farmgate Milk Price reflected continuing volatility, with the GlobalDairyTrade price index declining 16 per cent since the start of the season on June 1.

“We have seen strong production globally, a build-up of inventory in China, and falling demand in some emerging markets in response to high dairy commodity prices.  In addition, the New Zealand dollar has remained strong. Our milk collection across New Zealand last season ending 31 May 2014 reached 1,584 million kgMs, 8.3 per cent higher than the previous season.

“This drop in the forecast Farmgate Milk Price will have an impact on our farmers’ cash flows.We continue to urge caution with on-farm budgets in light of the continuing volatility in international dairy markets,” said Mr Wilson.

Chief Executive Theo Spierings said the increase reflects the Co-operative’s expectations for improved returns on its value-add and branded products, given volume increases and lower input costs.

“As we continue to drive for growth in our consumer and foodservice businesses, during the first half of the current financial year we expect reduced cost of goods arising from lower dairy commodity prices to have a positive impact on returns.

“It is important to note that in light of the significant volatility, our dividend estimate is based on zero ingredients stream returns at this early stage in the season.

“We continued driving our V3 strategy throughout the previous season and that is why we can support an increased estimated dividend range for the 2014/15 financial year.

“Our forecasting anticipates some recovery in global dairy prices but it is too early to predict how strong this recovery will be or when it will kick in. . .

This drop was expected after successive drops in price in GlobalDairyTrade auctions and volatility in world markets.

It certainly isn’t welcome but it shouldn’t be regarded as cause for panic either.

 

 


Rural round-up

July 6, 2014

Young Farmer named for 2014:

David Kidd has beaten seven finalists over three days of competition to become the 2014 Young Farmer of the year.

In the 46 years of the contest’s history, Mr Kidd is the first Northern region finalist to take the title.

His father Richard Kidd was third in a young farmer competition in 1984.

Mr Kidd joked his inspiration for competing was to better his father and said he’ll be rubbing it in when he sees him. . .

Evil among us – farm community closes ranks – Rebecca Ryan:

The quiet and friendly community of Ngapara has been shaken.

Neighbours are watching out for neighbours, new chains and locks have been placed on gates and security cameras on fence posts, some residents are unable to sleep at night and farmers are requiring help to carry out basic farm work – all fearful after a mass killing of more than 215 sheep on two different properties in the area, two weekends in a row.

They are all hopeful the culprit, or culprits, do not return this weekend.

Police believe the killings may be linked and a firearm was used in both. . .

Dairy head to focus on environment - Gerard Hutching:

Newly elected Federated Farmers dairy chairman Andrew Hoggard said focusing on the environment was one of his two main priorities.

The other was to deal with the issue of labour standards.

A Feilding dairy farmer, Hoggard said it frustrated him that farmers were always trying to play catch up when it came to dealing with environmental issues.

He acknowledged there was a “real issue” of water quality being affected by dairying.

“Cows urinate and that’s got a lot of nitrogen in it, but a lot of people perceive there’s a pipe coming out of a cow shed and into a river. There are a few ratbags but things are in place for farmers to do the right thing. I don’t defend those who don’t,” he said. . .

Firm finds cunning niches – Emma Rawson:

From a mechanism that cleans up geese poop, to small parts for a Fisher & Paykel baby incubator – the range of machinery designed and manufactured by Dannevirke company Metalform is about as broad as it gets.

But the products have one thing in common: they provide solutions to problems deemed too small for the big international manufacturing giants to produce.

Solving Canada’s geese waste issue might not be big business for an agricultural giant like John Deere, but for family-owned Metalform, its Tow and Collect product has been a winner.

Tow and Collect is being used in North American towns to clean up after Canadian geese, which leave a large volume of mess on golf courses and parks during their migration. . .

Fieldays set to get even bigger – Andrea Fox:

National Fieldays will offer up to 100 extra exhibitor sites next year and a new dairy innovation centre is in the pipeline.

Chief executive Jon Calder said the new sites were part of a master plan for the Mystery Creek Events Centre and would maximise the central exhibition space area.

Large-scale exhibitors who have been seeking a new area are likely to benefit but Calder said the flow-on effect for all exhibitors of an improved design and layout would be positive.

The planned dairy innovation centre, which might not be ready until 2016, would be based on a pavilion model in Canada and would bring together in one area exhibits devoted to the dairy industry, including a herd of cows, live robotic milking, interactive plant and equipment displays, and effluent systems, Calder said. . .

Fonterra targets audience of two billion - Hugh Stringleman:

Fonterra intends to be a dairy co-operative that makes a difference in the lives of two billion people by 2025, chief executive Theo Spierings says.

It was already the world’s largest milk processor and dairy exporter and now it wanted to be a globally relevant co-operative, Spierings said.

Growth in demand was forecast to exceed dairy product supply growth by 3% each year in the massive markets of China and India from now until 2020, he said.

India’s forecast compound annual growth rate was 10% and China’s 7%, whereas their supply growth rates were 7% and 4% respectively. . . .

Life in the saddle – Pip Courtney:

PIP COURTNEY, PRESENTER: In the bush, no-one likes a skite. But while modesty’s an admirable trait, it’s kept many with fascinating lives from writing their memoirs.

Alwyn Torenbeek’s a good example. Despite an extraordinary life, it took years of badgering from his family before the 77-year-old retired drover agreed to put pen to paper.

At just 21, he was Australia’s bronc-riding champion, known for his bravery, natural talent and cheeky showmanship. But his biography is about more than fame. There’s adventure, tragedy, romance and mateship, and that indomitable bush trait, endurance.

An endurance riding camp has its own pace. There’s plenty of time to catch up with mates and swap stories, some of them tall.

At Alwyn Torenbeek’s camp, you’re assured of a yarn or five. . .

Good calving nutrition can better support calving season

With calving season just around the corner, the Dairy Women’s Network (DWN) and SealesWinslow have teamed up to educate dairying women around the importance of good calf nutrition.

Ballance Agri-Nutrients, through its animal nutrition business, SealesWinslow, will be running a series of interactive calf nutrition days across nine locations in New Zealand during June and July.

Mike Stephens, dairy category manager for Ballance Agri-Nutrients said the sessions will provide participants with practical, hands-on skills to raise healthy calves and, in the long term, build healthier and more profitable herds. . .


Rural round-up

June 10, 2014

More qualifications needed in future:

A new report released by the Ministry for Primary Industries indicates a lot more people in the sector are going to have to have a tertiary qualification if they hope to take advantage of a predicted 15 percent increase in jobs by 2025.

MPI manager of science and skills policy Naomi Parker said even roles that traditionally did not require post secondary school qualifications would do so in future because of the increasing reliance on technology. . . .

Eradicating TB from Rangitoto enhances biodiversity:

TBfree New Zealand is working with environmental groups to stamp out pests in the Rangitoto Range to control bovine tuberculosis (TB) and bring the birds back.

The Hauhungaroa and Rangitoto ranges make up a part of New Zealand’s 10 million hectare TB risk area in which TB-infected wild animals have been found.

The objective of the national pest management plan is to eradicate the disease from at least 2.5 million hectares of the country’s total TB risk area by 2026. TBfree New Zealand aims to eradicate the disease from the Rangitoto Range as part of this plan. . . .

Water and governance under scrutiny at Massey:

Framing new ways for organisations to collaborate over controversial decisions, such as water use, is the focus of a Massey University symposium involving some of New Zealand’s key leaders in governance.

The July 8 symposium, Redefining Governance for the new New Zealand, brings together a diverse range of experts and thought leaders with experience in governance.

Speakers and panellists include Alastair Bisley (chair of the Land and Water
orum), Suzanne Snivelly (economic strategist), David Shand (public sector reformer and a member of the Royal Commission on Auckland Governance), Grant Taylor (Auckland Council’s governance director), and Dave Hansford (award-winning photographer and environmental journalist). . . .

Fonterra Appoints MD Global Operations:

Fonterra Co-operative Group Limited announced today the appointment of Robert Spurway to the role of Managing Director Global Operations, a newly-created position on Fonterra’s management team.

Chief Executive Theo Spierings said Mr Spurway was uniquely qualified for the position.

“Robert is currently Acting Director New Zealand Operations in NZ Milk Products, responsible for overseeing milk collection, manufacturing and logistics for the Co-operative’s New Zealand milk supply.

“One of our top business priorities is to optimise our global ingredients sales and operations footprint, so we can better manage price volatility and increase value, while ensuring a total focus on food safety and quality, and our customers’ needs. . .

 

 Technology to top farmers’ shopping list:

Agricultural Fieldays 2014 will be a measure of how the agribusiness sector is gearing up to capitalise on growing export opportunities, according to New Zealand’s largest agricultural lender, ANZ New Zealand.

“With an economic recovery in full swing and growing export demand for New Zealand agricultural products, the scene is set for farmers to again invest in the technology that will drive productivity,” said Graham Turley, ANZ’s Managing Director Commercial & Agri.

“Agri-business is New Zealand’s most productive and successful business sector and it achieves this through ongoing investment in market leading technology. Agri businesses are only as successful as they are because they constantly innovate. . .

 

Hottest new dairy technology designed in New Zealand:

Technology designed to bring the power of intelligent communication and unprecedented future proofing to dairy farmers’ milking systems will be highlighted at National Fieldays.

The product in the spotlight at this year’s show (11-14 June) on the Waikato Milking Systems stand is a newly designed product known as the Bail Marshal.

The New Zealand owned company’s Chief Executive Dean Bell says the innovative product has been designed to enable all technology devices on a milking system to work together seamlessly and continually communicate with each other. . . .

Sharp Blacks Get Ready for the Tri-Nations:

 

Pure South Sharp Blacks

Our national butchery team diced up their final practice yesterday proving they have got what it takes to defend their title against Australia and England next month.
This year our team of six top butchers, the Pure South Sharp Blacks, travel to Yorkshire, England to compete in the Tri-Nations Butchers’ Challenge.

After many months of refining their skill, the Pure South Sharp Blacks performance at their last practice, held at Wilson Hellaby in Auckland, has confirmed just how promising our national team is. . .

Ambitious Butchers Make the Cut:

The Alto Young Butcher and Competenz Butcher Apprentice of the Year is well underway with the Lower North Island Regional held yesterday in Palmerston North.

The Alto Young Butcher winner Alex Harper of The Village Butcher in Frimley, Hastings and Competenz Butcher Apprentice winner Amy Jones of New World Taumarunui have successfully secured their place to challenge some of the finest butchery talent in the country at the Grand Final in September.

Alex and Amy’s motivations are high with a study tour around Europe up for grabs if they are successful in the next stage of the competition. . . .

A taste of New Zealand in Dubai, Taiwan and Singapore:

New Zealand Trade and Enterprise has been giving the world a taste of New Zealand.

In Dubai, New Zealand was centre stage for the 2014 Taste New Zealand chef competition. Targeted at professional chefs, the competition aims to raise awareness of the diversity and quality of New Zealand food and drink products available in the United Arab Emirates amongst chefs, buyers, and food service and retail industry leaders. Last year, the competition helped NZTE customers secure $4 million in new deals. . . .


Fonterra forecast $7

May 28, 2014

Fonterra’s forecast payout for this season has dropped and the forecast for 2014/15 is back to $7.

Fonterra Co-operative Group Limited today announced an opening forecast Farmgate Milk Price of $7.00 per kgMS for the 2014/15 season – matching the opening forecast provided 12 months ago at the start of the 2013/14 season.

The forecast Cash Payout – which comprises the Forecast Farmgate Milk Price and dividend for the 2014/15 season – will be announced in July when Fonterra’s budget is completed and approved.

The Co-operative is forecasting milk supply for the new season of 1,616 million kgMS – up 2 per cent on the current season forecast of 1,584 million kgMS.

Chairman John Wilson said the new season Farmgate Milk Price forecast remained historically high, matching the Co-operative’s opening price of the previous season, but also reflecting current market conditions.

“Our farmers understand the realities of dairy commodity price cycles, and will exercise caution at this early stage in the season,” he said.

Chief Executive Theo Spierings said the shift in supply and demand over the past few months showed that volatility continued to exert a strong influence over the global outlook for dairy.

“Dairy commodity prices have come off the peak reached in early February this year, as global supply and demand have rebalanced.

“There is currently more milk available for the international market to absorb. We expect demand from China to remain strong. In Russia, there will be pressure on the balance between imports and local production. These factors are expected to continue influencing the supply-demand balance,” said Mr Spierings.

Revised 2013/14 Forecast

The Co-operative also confirmed today that it is reducing its current forecast Farmgate Milk Price for the 2013/14 season to $8.40 per kgMS. Along with a reconfirmed forecast dividend of 10 cents per share, the change amounts to a forecast Cash Payout of $8.50 for a fully shared-up farmer.

Chairman John Wilson said that when the last forecast was made in late February, the forecast Farmgate Milk Price derived under the Milk Price Manual was $9.35. The Milk Price Manual calculation is now 40 cents lower at $8.95.

“When we announced the last forecast Farmgate Milk Price, it was 70 cents per kgMS below the then Milk Price Manual calculation. We made that decision to protect the Co-operative.

“After seeing recent improved stream returns on powders and other products, and considering the level of risk likely in the remaining three months of the financial year, the Board has decided to reduce that 70 cent gap by 15 cents, to 55 cents.

“That is why today’s forecast Farmgate Milk Price amounts to a 25 cent net reduction from $8.65 to $8.40,” he said.

Chief Executive Theo Spierings said volatility remained an issue. The revised forecast reflects the recent fall in global dairy commodity prices, as well as the impact of currency movements.

“Our previous guidance on the earnings range remains unchanged.

“GlobalDairyTrade (GDT) prices have tracked down in recent events, with the GDT price index down more than 22 per cent since a peak on February 4, 2014. Since that date, prices for whole milk powder on GDT have decreased by 22 per cent, while skim milk powder prices are down 23 per cent.

“Despite the weaker auction results, the New Zealand dollar has remained firm. The exchange rate has moved from NZD/USD 0.835 to sit above NZD/USD 0.855 for the majority of the last two months,” said Mr Spierings.

The forecast Farmgate Milk Price change for the current season will not mean any revision to the June payment of the Advance Rate Schedule. The 25 cent net reduction will be spread over the July to October payments.

No-one who has been following the signals will be surprised by this.

The international supply of milk has been increasing and the price has eased because of that.


Farmers subsidisng NZ consumers

November 29, 2013

The question of why milk isn’t less expensive here when we produce so much is often asked.

What most people don’t know is  the retail price is well below the real cost.

. . . Chief executive Theo Spierings said the downside of strong demand for dairy commodities was increasing pressure on Fonterra’s NZ Milk Products division where profit margin remained under pressure.

To illustrate his point, Spierings said if the division were to pass on to consumers of a two litre bottle of milk in New Zealand the full price paid to farmers for their milk, the retail price would need to increase from $4 to $6 and the co-operative would be facing a media storm.

“And that would not be the worst of it…we would see the volume of dairy consumption in NZ going down very fast.”. . .

Fonterra and ultimately the farmers which supply it are subsidising consumers.

One reason for the higher cost is that we’re no longer low-cost producers.

The traditionally low-cost pasture-based dairying regions, such as New Zealand, have lost their cost advantage as input prices have risen, and now compete on the global market with a similar cost of production to producers with more intensive farming systems, according to a recently-released industry report.

In the report, No longer low-cost milk ‘down under’, agricultural banking specialist Rabobank says global milk production costs have converged between dairy-exporting countries, as the traditionally low-cost milk producers have seen their production costs rise, off the back of volatile global feed prices and the increasing use of feed in traditional pasture-based regions.

Report author, Rabobank director of dairy research, New Zealand and Asia Hayley Moynihan says New Zealand milk producers will need to structure their businesses and production systems to withstand ongoing high price volatility – for both dairy commodity prices and inputs.

Higher costs can be absorbed when the payout is higher but costs rarely drop quickly when the payout falls.

Ms Moynihan says lower-cost regions, like New Zealand, have already “largely capitalised their efficiency gains in a high milk-price environment into the price of land and other assets”.

Therefore there is a need to adapt to this loss of absolute competitive advantage in milk production as efficiency gains become more difficult to obtain.

“It is likely that optimal supply chain efficiency could at least partially mitigate this loss,” she says.

“Efficiencies achieved downstream in milk processing and marketing via a strong route to market and established supply chain relationships will likely play a greater role in differentiating competitive export companies and industries into the future.”

Ms Moynihan says to ensure that competitiveness is based on more than just the cost of producing milk, the New Zealand dairy industry will need to work hard to ensure that it stays ahead of the pack in supply chain efficiency, market access, marketing and sensible regulation. . .

We also have to safeguard our reputation for high quality, safe food.

The New Zealand dairy industry, most well-known for its low-cost production, has moved, perhaps irrevocably, to a higher cost farming system, the Rabobank report says.

Ms Moynihan says the structural increase in milk prices globally and locally has driven the quest for increased production, almost at any cost.

“The first signs were there in 2002 when , on the back of milk prices increasing 42 per cent over two seasons, farm working expenses surged 33 per cent per kilogramme of milk solids produced,” she says.

“The reality check of a 32 per cent lower milk price in 2003, which remained at a similar level over subsequent years soon saw expenses fall back into line.”

However, Ms Moynihan says the 72 per cent lift in milk prices in 2007/08, and higher prices on average in the years following, brought a steep increase in production costs Media Release November 27, 2013

that show little sign of abating without a significant change in farming systems or an economic crisis.

Farm working expenses increased 72 per cent in 2007/08 on the prior season and interest cost rose 29 per cent with both expenditure categories oscillating around these higher levels ever since, she says.

Additionally, higher interest costs per kgMS have been driven by New Zealand dairy farmers’ increased debt, not higher interest rates, Ms Moynihan says.

“The significant increase in dairy land values over the past decade combined with an increased focus on land acquisition resulted in aggregate farm debt across the dairy industry more than doubling since 2002 to almost NZD 20 per kgMS produced,” she says.

New Zealand producers are likely to experience upward pressure on milk production costs over the coming years as they are confronted by a rising interest rate market and the likely impact of future environmental regulations on farming systems and milk production levels.

“Tackling environmental issues is likely to result in a variety of measures that may include increased infrastructure on-farm, altering pasture management or decreased intensity of farming systems which all impact production cost dynamics”.

Ms Moynihan says milk producers in New Zealand should consider where the competitive advantage lies for their own operations.

“Increased exposure to the global dairy market for some milk producers and greater intensification on-farm for others has added complexity to many dairy farm businesses,” she says.

“A flexible production system at a higher average cost may still be competitive if it provides resilience during a downturn.”

With high volatility expected to continue for both milk prices and production costs, the ability to lower inputs and/or costs during periods of abundant global supply would be a distinct advantage, Ms Moynihan says.

“Southern Hemisphere producers previously survived global market downturns for prolonged periods due to the size of their absolute comparative cost advantage,” she says.

“With this cost advantage now minimal to non-existent, other strategies to survive the inevitable downturns – albeit likely short-term – will be required.”

Any dairy farmer not doing well with this season’s forecast record payout shouldn’t be in the business.

But next season’s payout will almost certainly be lower and even the best farmers have to keep a rein on costs to ensure they can cope with less money.

Businesses which service and supply farms also have to be aware that while they might be making hay under this year’s sun, next season could be cloudier.


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