Farmers’ confidence has sunk to its lowest level in three years, according to the latest Rabobank survey. Farmers’ outlook for the rural economy for the next year has dropped to a net minus 33%, from minus 2% three months ago.
“The drop of this magnitude is significant,” says Rabobank agricultural analyst Blake Holgate. “It follows three quarters where confidence was gradually increasing.“
And it’s likely to fall further by the end of the year, as the next survey will ask farmers how they feel about new freshwater reforms.
Confidence in the dairy sector won’t be boosted by Fonterra reporting a whopping loss of $605M, on top of the previous year’s loss of $190m.
Fonterra’s poor performance is said to be one of the factors driving down confidence.
Federated Farmers president Katie Milne (in a report by Radio NZ) says she is really worried about the mood of the sector.
“They should be able to be looking forward and optimistic. It’s really such a shame that we have our people actually in such a bad place at the moment.”
She points out while farmers feel under siege, commodity prices are good.
For those efficient farmers who have got their costs of production under control, it’s a case of hanging in there—but for those whose bankers are hammering them, the prospects are bleak.
From the dairy industry’s point of view, the question is whether Fonterra has succeeded in cleaning house, and got its business back on the right track.
In posting a net loss of $605m, the bottomline for Fonterra was slightly better than earlier indicated. The co-op was forced to delay the release of its annual accounts while auditor PwC worked through significant accounting adjustments related to the write-downs.
The Financial Markets Authority has also been in discussions with Fonterra after a formal complaint from a shareholder about its financial accounts from 2015-2018.
Fonterra told its shareholders today its normalised earnings before interest and tax were $819m, down 9%. It confirmed no dividend would be paid for the year to July 31 as it pays down debt, and announced a final farmgate milk price for the 2018/19 season of $6.35 per kg/MS.
On its underlying performance, Fonterra’s normalised earnings per share for the year was 17c, which was above the last forecast for the year of 10-15c.
The co-op forecast a $6.25-7.25 per kg/MS milk price range for the 2019/20 year and forecast earnings per share of 15-25c.
Normalised sales revenue for the year was $20bn, down 2%
Fonterra CEO Miles Hurrell said that 2019 was “incredibly tough” for the co-op but it was also the year Fonterra made decisions to set it up for the future.
“The gross margin from our largest business, NZ Ingredients, was $1,332m, up 3% on last year due to increased sales and price performance.
“Our Foodservice performance also improved on last year, with gross margin up 10%. This was despite lower total sales volumes, following a slow start to butter sales in Greater China and Asia.
“But we can’t ignore that we had a number of challenges across the year – these included Australia Ingredients, our businesses in Latin America and the consumer businesses in Sri Lanka, Hong Kong and New Zealand.”
On Fonterra’s new strategy, Hurrell said the aim was to unlock value focus on three goals – “healthy people, healthy environment and healthy business”.
Fonterra has dropped ambitions to be a global dairy giant sourcing milk from around the world in a new business strategy which dictates “less is more”.
“This is the right strategy for us, but it requires us to make some hard choices. We’ve looked at the big opportunities and risks for a New Zealand dairy co-op today. We’ve also got clear on what our strengths are and the hard realities we have to face up to.
“I’m pleased that we now have a strategy that is built from the belief that our farmers’ milk here in NZ is the best and most precious in the world. Recognising this, while we will complement our farmer owners’ milk with milk components sourced offshore when required, we will start rationalising our off-shore milk pools over time.
“This focus on dairy ingredients and foodservice will see us playing to our strengths and driving more value from the parts of our business that consistently perform.We will still be in Consumer and will focus on markets throughout Asia Pacific. The majority of the products we sell in these markets are made from NZ milk and are similar to those we sell in our Ingredients business.
“This creates efficiencies and helps us play to our strengths. It also means we will reduce our consumer product portfolio to those that create superior value.“
So if Fonterra’s shareholders can take heart from the prospect that Hurrell and his team are succeeding in turning the business around, is the drop in farming confidence justified?
Analysts believe other factors are dominating the current mindset in the farm sector. Environment issues and government policies such as the zero carbon bill are rattling farmers. They’re worried about how they’ll meet proposed regulations that will require them to reduce methane by 10% by 2030, and a tougher reduction by 2050. And the freshwater proposals advanced by David Parker are a major concern.
But wait: will NZ First leader Winston Peters ride to the rural sector’s rescue?
The word out of the Beehive is that Peters sees an opportunity to become the farmers’ hero by putting a brake on the Parker plan (and a chance to get NZ First’s vote back over the 5% at next year’s election).
The old master knows without such a flag-waving exercise, NZ First could be history.