Word of the day

August 7, 2015

Steatogenous  – producing fat; lipogenic; causing fatty degeneration or any disease of the sebaceous glands.


Fonterra forecast $3.85 plus 40-50c/share

August 7, 2015

Fonterra’s forecast payout has dropped from $5.25 per kilo of milk solids to $3.85 plus 40 to 50 cents a share.

In a newsletter to shareholders chair John Wilson says:

The Farmgate Milk Price forecast has been reduced from $5.25 per kgMS to $3.85 per kgMS due to the continued significant imbalance in the global dairy market between surplus supply in 2014 and current weak demand.

This imbalance and the challenge of lower prices continuing for longer than anticipated is a global issue, and one with which dairy farmers globally are increasingly grappling.

Current prices are unsustainably low and we are seeing them beginning to impact production levels globally.  We have confidence that prices will recover over the course of the season.

This is going to be a tough season, and we encourage you to make your decisions based on today’s forecast Milk Price.  We will update as the season progresses.

We have adjusted the Advance Rate in accordance with our policy.  We need to balance protecting our Co-operative while we have this volatility, with getting cash to you. . .

Forecast total payout available to farmers

We have announced $4.25 – $4.35 forecast total payout available to farmers for 2015/16.  It is made up of:

  • the revised forecast Farmgate Milk Price of $3.85 per kgMS
  • an earnings per share range of 40 – 50 cents.

We have returned to using a forecast total payout available figure to provide clarity on business performance, consistent with the way we have previously reported to you.

The forecast earnings are expected to be influenced by:

  • the positive impact of the lower Farmgate Milk Price on consumer margins globally for New Zealand-sourced products
  • the contribution from changes being made within the business
  • movements in New Zealand product mix returns.

The final decision on what is paid as a dividend will be based on our policy of paying out 65-75 per cent of adjusted Net Profit after Tax over a period of time, at the Board’s discretion.

At this stage in the season, budget on a forecast Cash Payout for 2015/16 season of $4.15 – $4.20.  This includes an estimated dividend range of 30– 35 cents per share. . .

The company can’t control global supply and demand but shareholders are asking why it set the opening price so high.

That price is what farmers and sharemilkers use to set budgets and make decisions on numbers of staff, amount of supplements, whether or not to buy extra feed and if so at what price, and other factors over which they have some control.

Everyone else appears to have known about factors like Russian boycott, the Chinese stock pile, the end of EU quotas and low feed prices in the USA which would all impact on supply, demand and price.

If the company didn’t know it should have, if it did it should have set a far more conservative opening price.

It is better to be conservative, set a lower opening price and increase it later than to set a higher price and have to reduce it.

Agribusiness professor Jacqueline Rowarth has called for a vote of no-confidence in the board.

I don’t think that’s likely but directors up for re-election should face strong nominees contesting them.

As for the rumour that there would be a second announcement today – nothing confirmed so far.


Rural round-up

August 7, 2015

Rabobank Report: Moving Globally; What role will China play in the global beef market?:

Rabobank sees great potential in China’s beef market, and believes that Chinese investors will play an influential role in the global beef market over the next decade. According to Rabobank’s latest report, Moving Globally: What role will China play in the global beef market?, China’s beef demand will grow an additional 2.2 million tonnes by 2025. Driven by the weak domestic production, but with strong demand, the beef sector will likely become the first agricultural sector where China has high integration with the rest of the world and Chinese investors are expected to play an influential role in the global beef market.

In addition to the volume gap, China’s beef market also demonstrates potential for value-added and branded beef products. Strong demand from the food service and retail market channels provides opportunities for both Chinese and foreign companies in the further processing sector. . .

 

Fonterra’s restructure more about poor strategy than milk price – Allan Barber:

When Fonterra was formed back in 2001, there was a great sense of optimism about the potential for a New Zealand dairy company to compete on a truly global scale. The industry’s infighting and parochialism would be a thing of the past and the clear intention was to use the greater efficiencies and scale to create a substantially better performing business model.

The big question 14 years down the track is whether that objective has even remotely been achieved. Fonterra is the world’s leading exporter of milk products and the fourth largest dairy processor, so achievement to date appears consistent with the objective. But for many observers there was another, more ambitious expectation: to establish an internationally competitive value added business to compare and compete with Nestle and Danone. . .

Dairy sector needs to work together to manage downturn:

National accounting and business advisory firm Crowe Horwath is calling on all stakeholders in the dairy industry to work together to help the sector get through the current difficult period of lower milk solid prices.

On the back of dairy companies announcing a string of forecast milk price downgrades and prices continuing to plunge at the Global Dairy Trade (GDT) auctions, predictions are the current hard times for the dairy sector could potentially last another 18 months to two years.

Crowe Horwath says given the scale of the challenge now being faced by the industry, doing nothing is not an option for anyone involved, including farmers, banks, farm consultants and business advisors. . .

 

Fish & Game Calls for Fonterra to Lift Its Game After Pollution Conviction:

Fish & Game says Fonterra needs to lift its game after the dairy giant was fined $174,000 for several pollution offences under the Resource Management Act.

The Bay of Plenty Regional Council prosecuted Fonterra for polluting the and other waterways after several wastewater system failures at Fonterra’s Edgecumbe dairy plant.

The offences occurred several times between September 2014 and April 2015.

Fonterra pleaded guilty to six charges and was sentenced in the Tauranga District Court by Judge Smith. . .

 

I’m worried! I’m sympathising with organic farmers over a land use conflict! – Jim Rose:

Writing this blog of sound mind and sober disposition, I still have considerable sympathy with two organic farmers over a land use conflict they have with the neighbouring gun range.

Local land use regulations allows a gun club to set up 600 m away with competitive shooting days all day for 88 days a year. That is a voluntary self restraint. They could hold shooting competitions every day of the year. The local land use regulations allow the use of guns on rural land. The gun club used this absence of a prohibition on the use of guns in the frequency of use to set up a gun range to fire guns all day long on rural land. . . .

Market Continues to Show Strength:

New Zealand Wool Services International Limited’s General Manager, Mr John Dawson reports that a continuing upward trend at today’s South Island wool sale saw prices increase.

The weighted indicator for the main trading currencies decreased from 0.6314 to 0.6181, down 2.1 percent. The US dollar rate was down to .6520 from .6670 which meant increased prices in NZC terms.

Of the 5,564 bales on offer 5,260 sold, a clearance of 95 percent. . .

 

Matariki Forestry Group announces recapitalisation:

Matariki Forestry Group (“Matariki”) today announced a NZ$242 million capital infusion from Rayonier Inc., its largest shareholder. This injection of capital will be used for the repayment of all outstanding amounts under its existing NZ$235 million credit facility and for general corporate purposes.

Upon completion of this capital infusion, Rayonier’s ownership in Matariki will increase from 65% to approximately 77% and the Phaunos Timber Fund ownership will be reduced from 35% to approximately 23%. The capital infusion is subject to certain closing conditions including New Zealand Overseas Investment Office approval and is expected to close by year end. Matariki will realise interest cost savings of approximately NZ$15 million annually as a result of the recapitalisation. . .

 

NZARN says strategic feed approach key to farmer viability:

Nutrition experts have entered the milk price payout debate saying that a strategic approach and optimising home grown and supplementary feed resources are key to long-term viability.

The New Zealand Association of Ruminant Nutritionists (NZARN) urges farmers, in an article published on their website (www.nzarn.org.nz) to benchmark themselves against the best performing farms to identify areas for improvement.

Dr. Julian Waters, NZARN Chairman says, “Maximising utilisation of home grown resources such as pasture, silage and crops should be the basis for a profitable business, with a sound strategy to incorporate supplements to increase efficiencies when home grown feed is limited.” . . .

 Internet Provider Puts Farmers’ Wellbeing First:

New Zealand internet provider, Wireless Nation, further demonstrates its commitment to the rural sector in a new agreement with Farmstrong, an initiative to promote wellbeing for all farmers and growers across New Zealand.

Wireless Nation’s zero-rated data agreement means that its Satellite Broadband customers can access Farmstrong’s website without the data counting towards their data cap.

Wireless Nation’s technical director, Tom Linn says he is passionate about making internet connectivity easier for people living in rural areas. . .

New Forests agrees to purchase Marlborough timber plantations from Flight Group:

New Forests today announced that it has reached agreement to purchase approximately 4,200 hectares of freehold land and softwood plantations from the Flight Group. The plantations consist of radiata pine and are located in the Marlborough region of New Zealand’s South Island.

The agreement forms part of a larger transaction by Flight Group, including the purchase of the Flight Timbers sawmilling assets by Timberlink, an Australian timber products processor that is also an investee company of New Forests. Completion of the plantation purchase by New Forests is subject to approval by the Overseas Investment Office. . .

 


Two announcements?

August 7, 2015

The rural grapevine is abuzz with the suggestion Fonterra will be making two announcements this afternoon.

The first will be a lower forecast payout which is expected is due mid afternoon.

A second might or might not follow it.


Friday’s answers

August 7, 2015

Andrei and J Bloggs provided the questions.

Tom provided some satire.

Anyone who stumped everyone can claim a bunch of winter sweet by leaving the answers below.


Keep calm and dairy on

August 7, 2015

Fonterra will announce a drop in its forecast payout today.

Whatever it is,  it will be below break-even for all but the very leanest of operations.

However, it is important to keep it in perspective. Most farmers will be facing a cash flow problem not an equity one.

There have been eight big drops in payouts in the last 40 years and only three of them have led to significant falls in land values. Those were during the ag-sag of the 80s, the Asian crisis in the late 90s and the GFC when the rest of the country and most of the world were in trouble too.

Providing farmers keep talking to and working with their bankers they will be willing to help them through the next season or two until the milk price improves.

Only then will they will focus on any structural problems because in spite of the rhetoric from the Chicken-Littles, banks aren’t going to be forcing people off their farms if there are alternatives. That would not only be bad for the banks and the troubled clients it would have a depressing affect on land values which would then start biting the equity in other farms.

There’s no doubt this season will be a test of farmer resilience:

The possible milk payout forecast by DairyNZ CEO Tim Mackle, based on Open Country, of $4 per kilogram of milk solids has the potential to hit the average dairy farm by $250K according to KPMG analysis. . .

This projected price level will sorely test farm system resilience and confidence according to KPMG Farm Enterprise specialist Roger Wilson.
“The Individual impacts will vary depending on farm system and debt.” says Wilson, “The outlook is tough but this is the time to apply some science and really examine the options.”

A lot of farms are actually adaptable and resilient and the smart farmers can be very responsive even in the short term. With stronger beef prices farmers may look at incorporating an element of dry stock farming, particularly if dairy herd sizes are reduced.

Where there’s crisis there’s also opportunity.

The KPMG Farm Enterprise team are already seeing proactive farmers using a combination of reducing the use of supplements and fertiliser, and lowering stock numbers and the reliance on off-farm grazing.

The big call is stock numbers where a one off cull of 10-20% of cows post calving might be a good option. Critically this has a one off cash flow benefit, and tightens the operating budget without impacting capacity in 24 months.

Roger Wilson says, “Expect this to contribute to a reduction in milk supply for 2015/16 which is forecast to provide Fonterra with a bit more flexibility at its end.”

The reduction in supply should contribute to improved operating performance for dairy companies in 2014/15. Fonterra is already running at full capacity which limits its product optimisation options. With increased capacity and reduced supply Fonterra will have the flexibility to move a much higher proportion of product into high value streams and drive a much better EBIT number.

It shouldn’t be forgotten that returns across the balance of the industry are still in a good place, 60% plus of the primary sector is booming, this shouldn’t be overlooked.

Red meat, pipfruit, kiwifruit and wine are all selling well and in spite of the hit the economy will take from the dairying downturn, it is still growing.

That said, this season will be difficult.

Sharemilkers are at risk if they have a lot of debt. Farmers who want to retain good people in the industry need to work with their sharemilkers and the banks to help them through the downturn.

The low payout will hurt people who service and supply dairy farms, including other farmers who provide supplementary feed or grazing. Some of these will be able to make the most of good beef prices.

The wider economy will also feel the pinch as farmers reduce their costs and cut back on expenditure where they can.

A banker told me one of his dairy clients regularly uses 80 other businesses, most of them smaller ones, and all of those will be hit as their bigger customers stop spending.

Dairying accounts for a bit more than 20% of our exports and around 5% of the economy.

The downturn has already spread off-farm but unlike the downturns in the 80s, 90s and noughties, the root of this one is one is largely confined to dairying.

Dairy farmers, sharemilkers and those who get most of their income from them will have a lean season.

But the sky isn’t falling and what goes down will go up again, sooner or later.

 

 


Quote of the day

August 7, 2015

One’s doing well if age improves even slightly one’s capacity to hold on to that vital truism: “This too shall pass.”  Alain de Botton


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