No need for another investigation into milk price

June 24, 2011

The Ministries of Agriculture and Economic Development and Treasury havelaunched a second probe into Fonterra’s pricing of milk.

They could save themselves a lot of time and effort by reading the National Bank’s Agrifocus which says :

On the face of it, it seems the rise in the price of fresh milk can be largely explained by the increase in international dairy prices and on-farm costs. Furthermore, the increase in fresh milk prices has not been out of step with the increase in the price of other staples. Its per unit cost when compared to other substitutes is particularly curious as it takes a considerable amount of money to produce, collect, transport, process and manufacture, store, ship and keep cool. In many cases milk is a far superior, nutrient–rich product.

If price increases alone are the precursor to an inquiry, then we would seem to need a lot of inquiries into other areas! Of course this will not be the case. The real issue is how economic agents adjust to the realities of a rising trend in real commodity prices – a reverse of the trend seen over the prior century.  New Zealand benefits hugely from such a trend, though there is a consumer cost along the way.

We export food and those exports are one of the few bright spots in the economy at the moment.

When demand and prices are high on international markets the price increases on the domestic market.

That doesn’t make it easy for people struggling on tight budgets but the problem isn’t high export prices it’s low incomes.

The report looked at the  rising cost of milk must be considered in conjunction with comparable movements in other staples and substitutes; rising input costs at the different levels of the supply chain; and international dairy prices.

Looking at the price movements of key foodstuffs over a 10 year period shows that the price of fresh milk has increased by 36 percent over this period, or 3.6 percent per annum. Over the same 10–year period, the headline inflation rate has risen 31 percent. Interestingly though, the price of different types of meats, bread and other dairy products, such as cheese, have all increased more than fresh milk over the last 10 years! The price of sheepmeat is the front-runner, increasing 73 percent over the last 10 years, over twice the rate of headline inflation.  There is some irony in this.  Economists normally point to competition as a way of keeping a lid on prices and there is certainly a lot of competition in the sheepmeat industry, so much in fact that people are calling for consolidation! So here we have an industry that has more competition and fragmentation than the dairy sector, which has seen higher price rises!  Of course, the underlying causes of price movements are far more extensive than that (i.e. reduced sheep numbers has led prices higher) but we still thought it worth noting.

Prices have gone up but let’s put it in perspective. A comparison with other liquid products (which don’t have the nutirtional benefits milk does) shows:

 It costs $1.84 for a standard litre of milk, $2.73 for a litre of bottled water, $1.52 for a litre of fizzy, $1.92 for fruit juice and $5.12 for a litre of beer (according to Statistics New Zealand).The price differential between milk and water is particularly curious in a country such as New Zealand where it is fine to drink water out of the tap.

In addition, we are trying to move up the value–added chain as an exporting nation but sometimes bemoan some brand–based products.  The suggestion that some branded milk products are priced too high seems perverse when we have constantly been told by various commentators, academics and successive governments that we need to build brands and market our products to add greater value (i.e. extract more money out of consumer wallets).  Especially when you consider the tap water/branded water differential!  It would be nonsensical to suggest that dairy companies should build brands offshore but not try to do the same in the domestic market. The discontent at the price of branded milk products seems to go against all the business principles that various individuals have preached over the last 20 years. And there is always the simple fact that if you cannot afford the branded product you can always purchase the unbranded one, which particularly in the case of fresh milk is very close in quality and content.

The other factor which impacts on the milk price is the cost of production.

Dairy farm total input prices have increased by nearly 34 percent, 3 percent more than aggregate consumer prices, and 2 percent less than the price increase for fresh milk.This would, on the face of it, seem to explain nearly all the observed milk price increase over the past 10 years. Ultimately, a complete examination would include other parts of the supply chain, notably the dairy processing sector, the two New Zealand supermarket chains and local dairies. This analysis would include margin and cost movements, but because of commercial sensitivity, it is difficult for us to obtain a complete dataset that would allow a full assessment for fresh milk.

Eleven of the 17 farm working expenditure categories have increased more than the price of milk.

The main culprits are fuel and electricity, which have increased a whopping 92 and 87 percent respectively over the last 10 years, or 9.2 and 8.7 percent respectively year-on-year.

One of the reasons fuel and electricity prices have increased is the imposition of the ETS. If Labour acts on its threat to force farmers to pay additional ETS levies it will impact on the price of milk.


Credit card crisis

June 30, 2009

If there’s a good time to be told your Visa card has been declined, at the airport just before departing overseas isn’t it.

But full marks to the lovely people at the National Bank and Visa who sorted it for me in about 30 minutes.

I phoned our banker who did some investigation then contacted the Visa people, one of whom phoned me straight back.

She explained that a transaction in Spain at midnight yesterday had triggered a fraud alert so they’d frozen the card until they’d checked that it was legitimate.

I knew what the transaction was, the woman cleared the block, took the details of our itinerary so they know what to expect and gave me a phone number to call from anywhere in the world if I have another problem.

I’m very impressed by their security consciousness. Better a minor hiccup than a raid on a credit card.

And while a problem with a credit card isn’t welcome, it’s not as bad as losing your passport.


Meat prices positive but costs up too

June 15, 2009

 Westpac and National Bank forecasts both paint a positive picture for meat in the next couple of years.

The only threat to meat prices appears to be the exchange rate, but the National Bank, in its Rural Report publication, said there was no reason the New Zealand dollar should stay high given the country’s high debt, large and ongoing current account deficit, and low to no economic growth.

It forecast two years of easing to about US49c before increasing to US60c.

Lamb prices have defied predictions of doom even in the face of a relatively high dollar, partly because of a drop in the ovine population after droughts in Australia and here. The large number of dairy conversions in the past couple of seasons have also led to steep falls in sheep numbers.

While supply has dropped, demand has been steady or risen.

The reports say the sheep meat industry should enjoy good conditions for two more years at least.

The reasons behind this season’s high prices – low lamb numbers, a weak pound against the Euro making UK lamb exports viable, and strong retail sales – should remain.

Farmers would also benefit from meat companies competing for lamb.

Some commentators were expecting a decrease in dining out as the recession bites to dampen demand for lamb but it appears any drop in orders from resaturants has been more than compensated for by increased sales at supermarkets as people rediscover the joys of home cooking.

Beef prices are a little more uncertain although reduced numbers after a big kill in the USA last season and on-going drought in Argentina will impact on supply.

Prices are only one half of the business equaiton and while they have gone up so too have costs.

Meat and Wool Economic Services survey of sheep and beef farm input prices show on-farm costs in the past year went up by 7.6% in the past year.

The biggest rise was in fertiliser which went up 33.8%;local body rates increased 5.6%; interest rates dropped by 6.7% and fuel prices dropped 14.2%.

The overall cumulative on-farm inflation for the five years to March 2009 was 32.2% and over 10 years on-farm inflation rose 50.4%

That compares with consumer prices which increased by 16% over five years.

If interest is excluded the underlying rate of on-farm inflation in the past year was was 10.7 per cent compared with 9.8 per cent for the previous year.

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ETS costs too high for agriculture

July 25, 2008

The costs from the proposed emissions trading scheme   will erode any improvement in red meat schedules and dairy payout.

This and other adverse impacts have prompted industry groups to call for more time to voice their concerns about the ETS amid widespread fears it will crush competitiveness for no environmental benefit.

There is absolutely no point in imposing costs on primary industry, or any other sector, if there is not going to be a measurable environmental benefit.

As the first country to include agriculture in such a scheme, the sector says its concerns have not been taken into account, prompting a pan-industry letter sent to Parliament calling for another chance to make submissions.The latest independent analysis of the scheme in its current form shows sheep, beef and deer farmers will be ‘hit hard’ by the ETS – much more so than their dairy counterparts.
Detailing a range of indicative costs for 2030 – the year when agriculture will pay full carbon emissions expenses – National Bank rural economist Kevin Wilson shows the cost of greenhouse gas (GHG) emissions per kilogram of product sold would be 38c for meat producers compared with 21c for dairy.
Given the dairy payout is historically higher per kilogram of milksolids than a kilogram of meat, it means sheep, beef and deer farmers would pay a higher proportion of income into offsetting emissions than dairy farmers.

The cost of emissions per hectare would equate to $185 for dairy and $84 for sheep and beef. Dairy also has a higher GHG cost per stock unit at $74, compared with $8.40 for sheep and beef.

Wilson told Rural News many variables will determine the ultimate costs, but the fundamental question is why New Zealand has agriculture in its ETS plans when no other countries do.
 
There is no satisfactory answer to this question, especially when New Zealand’s extensive grazing systems put us among the most productive producers of protein with the lowest carbon emissions in the world. 

He says 2018 – when agriculture would enter the scheme – is actually a lot closer that it seems given the changes that would need to be implemented: ‘Now is the time to start preparing potential management options.’Meat & Wool NZ chairman Mike Petersen is not surprised to hear the ETS costs to dairy farmers are lower because they generally sell more product and at a higher price.
But his major and immediate reason in pushing for change to the scheme is that New Zealand is the only country in the world to put agriculture in an ETS. ‘It’s a real concern to us,’ he says.
‘That’s why we are arguing there needs to be some recognition of the competitive factors that New Zealand agriculture will face as a result of being the only country in the world to do so.’

MWNZ was one of 14 industry groups calling for the chance to provide further submissions to the Climate Change Bill recently amended by the Finance and Expenditure Select Committee.

Petersen is concerned the ETS goes beyond meeting the nation’s international obligations, and warns carbon neutrality is not a sustainable long-term goal for New Zealand’s sheep and beef industry.

Another worry is ‘trade-offs’ being made in Parliament to pass the bill before the election, says Petersen.

Keeping Stock wonders if Helen Clark’s support of Winston Peters this week is because she needs his support fot the bill.

Wilson’s calculations are based on a conservative carbon cost of $25/tonne, plus stocking rates of 2.5 cows/ha for dairy and 10 stock units/ha for sheep and beef. It takes fertiliser application of 500kg/ha for dairy and 50kg/ha for sheep/beef, production of 875kg of milksolids/ha and 220kg of meat and fibre/ha, along with 7.4t of CO2 equivalent per square hectare emitted for dairy and 3.4/ha for sheep and beef.
 
No-one knows what the cost will be, it is unlikely to be lower but it could be much higher.

 


Count Down to Nat Bank Young Farmer Contest

July 9, 2008

The seven finalists in the National Bank Young Farmer Contest  have been working for months to prepare themselves for the competition which starts in Ashburton on Thursday.

Aorangi finalist Nick Webster is hoping to better his own and his father’s places in previous contests. Nick, a partner in the family’s cropping farm in North Otago, was third in the final three years ago and Jock was second in what was then called the Skellerup Young Farmer of the Year in the 1970s.

The Otago Southland finalist Kyle Thorburn was sixth in last year’s final. The other finalists are Grant Charteris (East Coast), James Donaldson (Northern), Steve Knight (Tasman), Fraser McGougan (Waikato-Bay of Plenty) andDavid Skiffington (Taranaki-Manawatu).

Judges will be testing them on a combination of farming knowledge, business, public speaking, practical and personal skills and intelligence – the range of skills and abilities modern farmers need to succeed.

At stake is $82,185 worth of prizes for the winner including a Ford Ranger four-wheel-drive utility, a Honda four-wheel-drive ATV, a selection of Echo equipment, cash from the National Bank, Ravensdown fertiliser and Swanndri clothing.

The total prize package for the final of $160,810 includes a Lincoln University Scholarship and the winner of the Market Innovation Challenge receives an AGARDT scholarship for the FAME programme valued at $28,125.

Buts its not just about what they might win, the finalists have come through tough district and regional contests so getting to the contest is an achievement in itself; and the winner gets not just the prizes but the kudos which goes with being the country’s top Young Farmer.


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