Earlier this week Point of Order drew attention to the contrasting fortunes of key components within New Zealand’s dairy sector, which by any account is a mainstay of the country’s export industry. In that instance it was the contrast between the report of rising revenue and profit of specialist milk supplier A2 Milk and the slide in Global Dairy Trade auction prices likely to lead to another downgrade in the milk payout for Fonterra suppliers.
The contrast was heightened later in the week, first with speculative reports that Fonterra is putting up for sale the iconic icecream company Tip Top (which could yield $400m to reduce debt) as well as its South American operations.
Then came news of the opening of a new $240m plant near Gore in Southland.
Agriculture Minister Damien O’Connor, speaking at the official opening, said the Mataura Valley Milk plant is a base for further development opportunities for NZ and for the farmers that supplied milk.
“It pushes the opportunity for NZ dairy to a new level and I guess others will catch up”.
Mataura Valley Milk general manager Bernard May said the plant was part of a strategic plan to invest in the world’s most advanced production technology, people and systems to deliver world-class nutrition.
“We’re keeping our milk price above the competition allowing our farmer shareholders to develop a culture of excellence that our nutritional customers can engage with.”
May reports the plant is running at capacity, processing about 700,000 litres of milk a day, and the first shipment of wholemilk powder left in early November.
“The plant is performing at peak milk processing capacity in its first year with no major issues.“
Nutritional product trials begin in mid-December, with the first commercial production set down for February. A rigorous testing process follows, with first nutritional products likely to be leaving the plant in April.
The vision is to be the world’s best nutrition business, May says.
Mataura Valley Milk announced the project was going ahead in 2016, after a $200m cash injection by the China Animal Husbandry Group (CAHG), a Chinese state-owned enterprise.
CAHG has a 71.8% stake in the site with 20% held by Southland farm suppliers. The remainder is held by Hamilton-based milk powder company BODCO and Mataura directors.
Mataura Valley Milk will be the brand for its products, despite the involvement of BODCO.
The project stems from one of Southland’s legendary figures, Ian “Inky” Tulloch, who 10 years ago had the idea of converting 50 acres of land and some disused sale yards at McNab into a milk plant.
Three years ago he travelled to China to sign with Chinese Animal Husbandary Group investors, signalling the plant would become a reality.
Yesterday he cut the ribbon at the official opening of the plant.
Specific requirements have been developed for Mataura Valley suppliers including the elimination of palm kernel extract (PKE) as a supplementary feed for dairy cows. May says consumers were at the forefront of the decision, with buyers wanting palm oil eliminated from their milk formula.
“We’ve got to get the supply chain right from the farm to the consumer”.
But if it is good news at the high end of the dairy sector, there’s less to cheer about at the other end.
The ANZ Bank – in its review this week – noted dairy commodity prices have moved in a downward trajectory since the beginning of the 2018/19 season, putting pressure on returns at the farmgate level.
A stubbornly strong NZ dollar is also negatively affecting returns.
“While higher commodity prices and a lower exchange rate are forecast to materialise before the end of the season, it is now unlikely these movements will come soon enough to support our previous milk price forecast. We have therefore revised our milk price forecast for the 2018/19 season to $6.10/kg milksolid(MS) (previously $6.40)”.
ANZ economists say the revised forecast assumes an improvement in dairy commodity prices in the second half of the season. Whole milk powder prices are forecast to average 6% higher than today’s prices across the remainder of the season.
To reach the lower end of Fonterra’s current $6.25/kg MS forecast, dairy commodity prices would have to average 10% higher than current prices.
Farm profitability for the current season has been revised down due to the fall in the forecast milk price and lower returns for cull dairy cows. Upwards pressure on farm working expenses has also been assumed, primarily due to the tight labour market and higher compliance costs.
Next season’s milk price is expected to be slightly stronger than the current season – assuming some recovery in dairy commodity prices alongside a weaker NZD. However, the majority of the improvement in income is expected to be offset by higher farm working expenses