Alps 2 Ocean gets funding boost

August 28, 2015

Prime Minister John Key, who is also Minister of Tourism, has  announced a further $935,000 will be invested to help complete the Alps 2 Ocean cycle trail.

“Once finished, the 310km trail will be a major tourism asset for the Waitaki and Mackenzie Districts, helping attract both local and international visitors to the area,” Mr Key says.

“There is strong support from local tourism operators, and a growing number of international tourists are already using the trail, with an estimated 25 per cent more users in January 2015, compared with the same period last year.

The Alps 2 Ocean cycle trail is one of 23 Great Rides that make up Nga Haerenga – the New Zealand Cycle Trail.

“The Great Rides have proven to be a significant driver of local and international tourism which is helping New Zealand stay on the international map as a top tourist destination,” Mr Key says.

“The trails are also boosting economic growth in the regions with reports from individual trails indicating that more than 1,200 jobs have been created.

“Figures also indicate at least 60 new businesses have been established as a result of the Great Rides being built, and over 40 businesses have expanded their operations to cope with the new demand from cyclists.

“The funding announced today will help build on that success, creating more opportunities for the region and New Zealand as a whole,” Mr Key says.

 This additional funding, made available through the National Cycleway Fund announced in Budget 2015, will bring the total Government contribution to the Alps 2 Ocean Cycle Trail to $3,705,000, and to almost $55 million to construct the trails nationally.

The local community has raised $955,000 of co-funding to contribute to the completion costs.

The 41 km section to be completed will connect Sailors Cutting on the shores of Lake Benmore with Duntroon, meaning users will no longer have to cycle on State Highway 83.

This is great news for the Mackenzie and Waitaki Districts, and the many thousands of people who will use the cycle way.

Cycling on the road is neither safe nor enjoyable.

The cycle way is already providing a financial boost for the districts even though it has yet to be completed.

Neighbours offer homestays in their historic homestead and enjoyed heavy bookings last summer from people using the cycle trail.

Other existing businesses on the route report similar increases in patrons and new businesses have been established to service and supply cyclists.

The A2O cycleway starts near Mount Cook and finishes in Oamaru which Lonely Planet dubbed New Zealand’s coolest town.


Plan A is working

August 18, 2015

One message from CEOs last week was the government needs to form Plan B in case the dairy slump worsens.

Lisa Owen put this to Finance Minister Bill English on The Nation and he responded:

. . . We run economic policy that underpins a flexible, resilient economy, so if prices are down in one area, we would expect people to— we’ve got a set of rules that enable them to react fairly quickly to that, and we don’t try and hide the message the world is sending us, for instance, about dairy prices. And lots of other countries, they’re increasing subsidies to farmers in order to brush over and hide that price signal. So this economy will diversify if there are other markets which are willing to pay more for our products. That’s where the investment will flow. And the good news on the horizon is that the US economy is recovering. It’s the world’s largest economy. It’s showing signs of sustainable growth. And that New Zealand businesses are responding to that positively, and I don’t agree with politicians—

But, Minister, that’s your plan A. That’s your plan A. Where’s your plan B?

Plan A is a flexible, resilient economy. If plan B is about politicians sitting on the sideline deciding where hundreds of millions of investment should go next, then we’re not interested in that sort of plan B. It will fail, as it’s failed in the past.

But business people who are on the front lines – 75% of the top business minds in the Mood of the Boardroom – they want you to have a plan B. Are they wrong?

Well, I’ve asked them about what their plan B is, and none of them have a plan B. They’re certainly inviting—

Maybe they’re relying on you for plan B, Minister.

They’re certainly not inviting politicians to say, ‘Right, we’re going to shift a couple of hundred billion— a couple of hundred million of investment from industry A to industry B.’ They are backing the Government approach, which is to ensure that we keep our costs down, the Government invests in infrastructure, because no one else can do that, we work on the pipeline of skills into the labour market so there’s people there that they can employ, and they make their risky commercial investment decisions, and that’s what they’re doing right now. Right around the country, businesses will be thinking about where to direct their investment, given that dairy’s not looking so good for the next year or two; tourism, wine, ICT is all looking better for the next two or three years. And they’ll make those decisions a bit more precisely and more sensibly than government would. .  .

Plan A is what got New Zealand through the GFC and the economy growing again.

We need more of it  – lower government spending, concentrating on addressing the causes of welfare dependency, investing in education and infrastructure, opening more trade opportunities . . .

That’s the business of government and private enterprise isn’t as Mike Hosking reminds us:

What’s a bloke buying a farm got to do with the government?
What has any person setting up a business got to do with the government?
When a shop closes is it the government’s job to mop it up?
When a factory down sizes… Is the govt supposed to do something?

Dairy, like all business products and markets is beyond a government scope.

A government is there to provide over arching policy direction… Like tax and trade deals and welfare.

It’s not there to milk the cows, man the tills and set the price for commodities. . .

If the CEO’s know what’s good for them and their businesses they won’t be asking government to get involved in them.

We don’t need Plan B and we definitely don’t need government minding the business of business.

 

 

 

 


False friends to farmers

August 12, 2015

In the bad old days a downturn in dairy prices would have led to government “doing something”.

Whether that something would be the right thing is moot.

Thanks to the “failed” policies of the 80s and 90s, the economy adjusts without intervention as Finance Minister Bill English pointed out in Question Time yesterday.

A drop in revenue of this magnitude in the dairy sector will have flow-on effects to the wider economy because the dairy sector makes up about 20 percent of New Zealand’s exports and around 5 to 6 percent of the total economy. The automatic stabilisers, though, are providing support to the dairy industry and to the benefit of other industries. For instance, the New Zealand dollar is down 25c against the US dollar for the last 12 months, and this underpins the returns of all exporters, not just those dealing with low prices. The Reserve Bank has cut interest rates, the overnight cash rate, to 3 percent and indicated this may fall further. The Reserve Bank’s most recent forecasts of the economy show that the economy is growing around 2.5 percent a year, which is solid, sustainable growth. . .

During the ag-sag of the 1980s, when all farming was really in crisis, we were paying more than 25% for seasonal finance and mortgage rates weren’t much lower.

The wider economy was doing badly too, with inflation raging.

James Shaw : Has the Minister of Finance received any reports that show that the New Zealand economy will face a $7 billion hole as a result of low dairy prices, and what specific measures is he putting in place to ensure that distressed dairy farmers are supported through this commodity price crash?

Hon BILL ENGLISH : Yes, I have seen those reports and I am pleased the member asked about them. In order to understand the context of this, that $7 billion reduction is a reduction on nominal GDP of over $220 billion. When you look at it that way, you can see that it is going to have a negative effect on the economy, but a containable effect, and we can continue to grow at moderate rates. In respect of dairy farmers in distress, Governments have had in place for some time measures for those families that are in severe financial distress, but generally the Government would not be looking to financially support dairy farmers because of low prices.

James Shaw : Does he regret telling Radio New Zealand in March that the concentration of capital in dairying was “not a bad thing”, and how will he now ensure that this over-allocation of resources into one sector does not now put out of work thousands of farm labourers, retailers, contractors, and suppliers who all rely on dairy farms?

Hon BILL ENGLISH : The flow of capital into the dairy industry has been based on a longer-term confidence that across the Asia-Pacific region the fast-growing class of middle-income consumers will show more demand for dairy and other protein products. That is a view of the world that is not really disputed by anyone in particular. In the short term, however, the reduction in income will of course have an impact on employment directly on dairy farms, but also in the supporting towns and services. The measures announced by Fonterra last week and the positive indications from the banks that they will finance cash flow for dairy farmers over the next 12 months mean that it will not be as bad as the straight drop in income indicates, because dairy farmers have to spend $4.50 a kilo just to get the milk on the truck.

Tim Macindoe : What implications do recent developments in the international economy have for New Zealand’s economy?

Hon BILL ENGLISH : Although there are risks in the global economy, it is evident that growth in our trading partners is holding up reasonably well—in the range of 3 percent to 4 percent. When we look back through the history of New Zealand’s growth patterns, it is reasonably clear that when our trading partners are growing at that kind of rate—3 to 4 percent—that is a positive indicator for sustainable, moderate growth in New Zealand of around 2 percent to 2.5 percent, which is our long-term trend growth rate.

James Shaw : Given his previous answer that investment in dairying was based on a long-range view of the sector, what work has he done to understand whether the dairy price collapse is actually a structural long-term change in the market rather than a cyclical short-term change?

Hon BILL ENGLISH : We try to make an assessment about that, the same as everyone else. It is pretty evident, though, that no one is quite sure. It is likely that dairy prices will not go back to $8 a kilo. In fact, it may well be not a bad thing because what is evident is that the price going that high has stimulated not just positive supply but probably excess supply. No one quite knows the answer to that question, but talking to the people whose capital investment is at stake and whose livelihoods are at stake, they maintain confidence that prices will rise from where they are—in fact, they have to, because they are below the cost of production—and they maintain a positive view about where they put their investment.

Grant Robertson : Has the Minister of Finance seen this report about the economy under his watch, which features a boat that has run aground?

Hon BILL ENGLISH : Yes, I have, and I thought how similar it is to the fate of the Labour Party. [Interruption] . . .

Hon BILL ENGLISH : In the interest of assisting the vice-great helmsman, as I understand it, that is the Westpac Economic Overview, and I note that its forecasts are for between 2 percent and 2.5 percent growth over the next 3 years, despite the fact that it says there is going to be a recession. .

But the Green co-leader still thinks it’s up to the government to do something.

James Shaw : Is he aware that organic milk powder commands up to six times the price premium of conventional milk powder on international markets, and will he turn this crisis into an opportunity by helping move more dairy farmers into organic milk production?

Hon BILL ENGLISH : If the member is correct that farmers can earn six times as much by selling their milk as they earn from organic milk, then I am quite sure they will.

So far organic milk hasn’t got much traction, but if there really is that sort of opportunity it’s up to farmers and processors to make the most of it without interference from politicians.

James Shaw : When he says that this is not a crisis and that dairy is just 5 percent of the economy, is he saying that when the All Blacks lose it just does not matter because they are one of thousands of sports teams playing over the weekend, many of which are winning?

Mr SPEAKER : In so far as there is ministerial responsibility, the Hon Bill English.

Hon BILL ENGLISH : Clearly, the Greens like New Zealanders being able to watch the All Blacks lose, but they do not them to be able to watch them win in the Rugby World Cup. I mean, when people use the word “crisis”, well, the Opposition should explain what that means. If those members think it means that dairy farmers are sitting around with their heads in their hands, paralysed by low prices, then they are wrong. Actually, they are getting up every morning, going out into the cold, wet weather, doing the calving, milking the cows, and spending the money they need to get their production moving and get their product to world markets. Calling it a crisis seems to me to be particularly useless. In fact, it downgrades the resilience and the responsiveness of not just the dairy sector but households right across New Zealand to a bit of economic pressure, which they can handle.

It’s the sad reality of Opposition to try to make the bad times worse. Thankfully most dairy farmers are too busy with calving to hear them.

3. ANDREW LITTLE (Leader of the Opposition) to the Prime Minister : Does he stand by his statement that New Zealand is on the “cusp of something special”; if so, was that “something special” rising unemployment along with plummeting dairy prices?

Rt Hon JOHN KEY (Prime Minister): Yes, I stand by that statement, for two reasons. The first is that I am positive and aspirational for New Zealand—

Hon Members : Ha, ha!

Rt Hon JOHN KEY : —unlike some people who are always talking the country down. But, actually, the second reason I stand by that statement is that I made that statement on a couple of occasions during debates in the 2014 general election, and we were on the cusp of something special: the worst pounding the Labour Party had ever had—

Mr SPEAKER : Order!

Andrew Little : Given that the number of people who are unemployed has risen by 13,000 and that unemployment in Taranaki alone is now at 7 percent, and there are hundreds set to join them due to major job cuts announced recently, is it not the truth of it that he is sending more and more families to the cusp of poverty?

Rt Hon JOHN KEY : Firstly, the Government has created—along with the people of New Zealand, of course—148,000 jobs over the last 2 years. But I note that the Labour Party has an interest all of a sudden, apparently, in farming. So when prices go up, it is nothing to do with the Government; when prices go down, it is everything to do with the Government! Those members are not asking: “Why are beef prices high? Is that the responsibility of the Government?”. But I make this simple point: the Labour Party wanted to put a huge number of costs on farmers. That was its policy during the election.

Andrew Little : Given that Westpac says that there will be no more job growth this year, and the economy has grown at just a quarter of the expected rate, has he not driven the economy to the cusp of a recession?

Rt Hon JOHN KEY : If the member goes and reads the Westpac report, the glimpse that I had a look through, it showed that growth will be between 2 percent and 2.5 percent over the next 3 years.

Andrew Little : Why has he failed to invest in diversifying the economy, neglected regional infrastructure, and turned a blind eye to the 35,000 jobs lost in manufacturing since 2008?

Rt Hon JOHN KEY : The member needs to get out a bit more—it is as simple as that. If you go around New Zealand and have a look at what is happening around New Zealand, you will see just how diversified the economy is. Tourism spending alone is up over 20 percent from last year, at over $8 billion. The information and communications technology sector is doing well. Kiwifruit growing is back from the lows of Psa. Beef farming is doing extremely well. Horticulture is doing well around New Zealand. Manufacturing—for 33 months in a row the performance of manufacturing index has been expanding. The services sector, export education—the only people who think the economy is solely dairy are in the Labour Party, and it wanted to tax those people— . . .

Little tried again.

Andrew Little : Given that dairy farm prices have already fallen by 18 percent since peaking last October, what preparations has his Government undertaken for dealing with increased sell-offs by insolvent farmers who cannot make ends meet with dairy prices so low?

Rt Hon JOHN KEY : What we have done over the course of the last 7 years, after straightening out the mess we inherited from Labour and with our very strong economic management, is to make the economy more efficient and more productive. Here is a bunch of things that we have not done: we have not brought the emissions trading scheme in straight away, we have not put a large tax on water irrigation, we have not put a capital gains tax on every farm, we have not increased the minimum wage to two-thirds of the average wage, and we have not taken money out of the Primary Growth Partnership. We are in favour of the Trans-Pacific Partnership. The Labour Party—

Mr SPEAKER : Order!

Rt Hon JOHN KEY : —is claiming it is the farmers’ friend. They were the policies it took to the election.

Andrew Little : What is the Government’s response to the reports that, contrary to Bill English’s claims, the banks are already forcing mortgagee sales on indebted farmers, and what is to stop more of these farms being bought by overseas investors?

Rt Hon JOHN KEY : Firstly, I am sure that the banks will work closely with farmers, as they typically do, because there is approximately $35 billion worth of debt, I think, sitting on dairy farms. One of the things the bankers will be sitting there and looking at is they will be looking at the policies of the National-led Government, which has supported the farmers; they will be looking at the proposed policies of Labour, which is anti-farmers; and they will be saying “Thank goodness National is in Government.”

The Opposition parties are trying to act like farmers’ friends but you don’t need a long memory to know they’d be false friends.

This time last year they were in campaign mode threatening to add all sorts of taxes, increase compliance costs and complexity and generally make farming less profitable, more difficult and less enjoyable.

And while they keep saying the government should do something about the payout  I haven’t heard  a single farmer echo them.

 


Quote of the day

August 12, 2015

. . . this Government has always given credit for the stronger economy to New Zealand households and businesses, which, in the face of a recession and an earthquake, rearranged the way they operated, became more efficient and leaner, and got themselves through a very difficult period. We have always attributed the strength of the economy to the people who are the economy. –  Bill English


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.


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.

 

 


Very unlike Lotto

July 31, 2015

The NBR’s annual celebration of achievement will no doubt attract derision from the usual suspects who don’t understand wealth creation, what it takes and what it provides for others:

. . .  New riches have been amassed, much of it self-made from creating businesses that employ thousands of people here and overseas. . .

The list attempts to quantify the value of people’s assets. It doesn’t measure the value their success provides for those they employ,  for those who service and supply them and for the economic, environmental and social fabric of the country.

There might be an element of luck in any endeavour but the success this list celebrates owes far more to hard work, skill and the willingness to take risks.

Vicki Jayne, who led the team who put the list together, says:

“But in many ways the actual money is not that important. It’s the stories behind it and the fact that these people have achieved a high level of success. You don’t get the money unless you achieve at a high level in the area you are functioning. It’s very unlike winning Lotto.”

While we celebrate success in sport and the arts, the tall poppy choppers too often deride business success.

That’s a pity, not for the money made but for what it takes to make it and what the people who’ve got it do with it.

This year’s list includes farmers among the newcomers:

When it comes to promoting farming investment in New Zealand, Craigmore Sustainables chief executive Forbes Elworthy could hardly have a better pedigree.

Not only has his family farmed in the South Canterbury foothills for five generations but he can also boast a stellar career trajectory that suggests he knows a thing or two about business. . .

Craigmore Sustainables is now responsible for 40 New Zealand farms which, as the company name suggests, are being run according to a series of community, environmental and business principles that have sustainability at their core. . .

A regular speaker at global investment conferences, he champions New Zealand as a safe haven for farming investment and explains why his company emulates “family farmer behaviours” rather than being “too corporate” in its approach.

Three of Craigmore Sustainable’s farms are in our neighbourhood. They’ve made a big investment in improvements to the properties some of which have enhanced the part of the Alps to Ocean cycle way which goes through their land.

A little further north are the van Leeuwens:

Robots, rubber-floored stalls, cows that live indoors and choose when to be milked – South Canterbury farming couple Adriaan and Wilma van Leeuwen are busy pioneering new frontiers in New Zealand’s dairy industry.

Last year, they opened the world’s biggest ever robotic milking operation under one roof in the small settlement of Makikihi. They even have a plaque from global dairy solutions supplier DeLaval to commemorate the event – and it marks a step change in how farms in this country are managed.

A massive barn houses 1500 cows who decide for themselves when they will head off to one of the 24 robotic stalls for a quiet feed while their udders are automatically prepped and milked. No longer having to deal with inclement weather, the cows are more contented, production goes up and employment costs go down. It’s also easier on the environment – the effluent is collected and reapplied to the farm as fertiliser, thus helping to grow the crops needed to feed the herds and make the whole system self-sufficient. . .

Wilma was a finalist in this year’s Dairy Woman of the Year award.

 

 

 

 


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