Fonterra’s financial wellbeing and global auction prices are among the dairy sector’s challenges

It’s shaping   up as a  tough  season  for  New Zealand’s  dairy farmers,  who  once  proudly  wore  the  label  of  the  “backbone of the  NZ  economy” , earning  by far the  largest  share of the country’s  export income.

So  what  are  the  problems  confronting  the industry?

Uncertainty in markets, for starters.   Prices  at the latest  Global Dairy  Trade  auction this  week slid  downward for  the fifth  time in  six  auctions.

The  Chinese  economy is under pressure   as  Trump steps up  his tariff  war.  Brexit  is a  threat which  could disrupt  NZ’s  dairy trade to  both the UK and EU markets.

At  home the big  question is whether  Fonterra,  after  racking up  a  $196m  loss last season,  can claw its  way back to profit.

The giant co-op  has been trimming debt and selling  assets  such as the iconic business Tip Top.  But it hasn’t been   been able to find a  buyer  for its stake   in Chinese infant formula  manufacturer  Beingmate   which cost  it  $755m  in 2015, an investment   now  rated  as  possibly the worst  ever  by a  NZ  company in an  overseas venture.  Fonterra  wrote down the investment  by $430m last year  and since then  efforts to  find a  buyer for its  18.8%  stake have proved   fruitless.

The co-op this week confirmed  its intention to sell its stake as part of its  three-point plan  to  turn around  its business.  CEO  Miles Hurrell  says Fonterra  has talked  to a number of parties  regarding  the  potential sale of its entire stake  in Beingmate  but has  yet to find a buyer.  As a result the  co-op is considering   selling part of the holding. It  could be a  slow  process  with  Beingmate shares  down at 4.94 yuan (compared with  the  18 yuan per share  Fonterra  paid).

Fonterra  has also been eyeing   an exit  from  several  of  its  other  overseas  businesses  as  it  seeks  to  sharpen   its  profitability.

Beingmate  is  not the  only Chinese  headache   for  Fonterra.  It  now  has   the Chinese  dairy  giant  Yili  making its presence  felt   with its  takeover  of  the country’s second biggest  co-op  Westland  Milk  to  add to  its  other   NZ  dairy product manufacturer  Oceania.

On  the   home  front   dairy farmers  are  faced   with  new  financial  penalties  as  the government brings agricultural  emissions into  the framework for  combating  climate change, despite there   being  no  tools   available to  measure accurately  methane  emissions   from  individual  dairy farms.

So    the incentive  for a    farmer  making strenuous  efforts to  reduce emissions   is the same  as for  one  who doesn’t.

Federated  Farmers   argues  the government  should adopt a methane target  which science indicates will ensure no additional impact on global warming,  rather  than an unsubstantiated aspiration that will cause lasting damage to rural communities and the standard of living of all NZers..

The  Feds’  climate change spokesperson, Andrew Hoggard,  told the Select Committee hearing on the Zero Carbon Bill the science says NZ agriculture needs to reduce methane by about 0.3% a year, or about 10% by 2050, to have no additional warming effect – or in other words a zero carbon equivalent.  Yet a 10% target has been set for 2030 – much earlier than for any other sector of society – and up to 47% methane reductions by 2050.

Hoggard  says that appears to be

” … because it seems easier to tell people to consume less animal-based protein than it is to cut back on trips to Bali.

“If that is the case then let’s be open and honest and admit the agriculture sector is being asked to do more than its share.

Farmers  may  feel  aggrieved   by   another of  the  government’s    climate  change  policies whereby  new  conventionally  powered   vehicles   are to be  taxed to subsidise  the  cost  of   new  electric  vehicles.

To  cap  it  all,   heavily  indebted  dairy farmers   could find  their   bankers  become  much less  accommodating  as the   Reserve Bank  imposes  new  rules    on  bank  capital  ratios.

But there was a ray of sunshine during the week – the fall   in the value  of  the   NZ  dollar against  the currencies of  most of its trading  partners.



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