Dairy farmers will be in the vanguard of NZ’s economic recovery – but it looks like they shouldn’t count on much govt help

NZ’s  dairy  industry  has  a   clear  role  to  play  as  one  of  the   country’s saviours in the  battle to recover  from the global impact of the  Covid-19 pandemic — even if there is  little evidence  that ministers  in the coalition government recognise  its  importance.

The industry, as  it has  done so  often  before,  will  just have to  do  it on  its own.

Luckily, the giant co-op,  Fonterra,   has  stabilised,  after racking up a  massive  $600m  loss  last year and there’s  a refreshed sense  of  where the  dairy industry  stands  in the  economy’s  hierarchy,  as  other pillars (tourism, international  education, air transport, construction)  tumble  over the  pandemic precipice.  Morale  at  the   grassroots  level  is  rising  again.

So  what’s  the  message    for  dairy  farmers as  the  2019-20 season  ends  and  they look ahead to  the next?   Batten  down  the  hatches  or  seek to  expand  production?

It’s  not  an  easy  one  for  many  Fonterra  suppliers, as  they move out  of a debilitating drought. But they have the  encouragement from  the  co-op  – the  payout  for the  season  just ending, though  at  the lower  end  of the range  earlier  signalled,  will  still be between  $7.10 and $7.30kg/MS.  That’s  above the  break-even point,  said  to be  around  $5.90.  

For  the   smart operator and/or those   without  much debt,  whose  cost of  production  is below the $5 mark,  it’s  a handsome  margin.

Furthermore,  farmers   will be  relieved  that  Fonterra  itself is regaining financial  strength.  It has  cut  net  debt  from  $7.4bn  to  $5.7bn.  Normalised earnings  before  interest  and tax  climbed to $815m for the  nine months  to  April 30,  or $301m higher than  for the  corresponding  period the previous season.

Any  inclination for  a  spending  splurge down  on the farm,  though,  will  be held in check,  since  Fonterra  is forecasting  a farmgate  milk price  for  the  new season as  low  as $5.40kg/MS through a  midpoint of $6.15 to  a  high  of  $6.90.   The extent of that  range    reflects  the uncertainty  facing  Fonterra,  as  some   key markets   are collapsing into  recession.        .

Chairman  John  Monaghan   points out the demand  for    milk products  is softening relative to supply and  pushing  down prices.

 “One of the main drivers of the softening demand is that many food-service businesses remain closed. On the supply side, the EU and the US have just been through the peak of their season and that milk is flowing into export markets and increasing competition for sales. As a result, prices are softening across the board.

“This supply and demand imbalance has impacted GlobalDairyTrade (GDT) prices for the products that determine our farmgate milk price. In US dollar terms, GDT prices for WMP are down 17% since late January.

“Looking out to next season, a global recession will continue to reduce consumers’ purchasing power. It is not clear what impact government interventions in the EU and US will have on curbing their milk supply, however, we expect our competitors there to put more of their milk into the product types that determine our milk price, as they chase government support programmes and favour longer-life products.

“COVID-19 adds significant uncertainty into the process of forecasting what will happen with global dairy prices over the next 15 months.”

Fonterra  is  injecting  $11bn  into  the  economy this year  from the  milk price it pays to  farmers, who spend  nearly half  of  that  in their  local  communities.

But  even its   CEO,  Miles Hurrell,  the man who steered   Fonterra  back on to  a  sound financial  bas,e concedes  the  co-op  in the  last  few years  hasn’t contributed  what  it  should, despite providing a  robust  milk price.

Many  within  the  industry  are  only too  conscious  that  upstarts  like  A2  Milk  and  Synlait have become  sharemarket  stars.  Who  among  Fonterra’s  10,000 suppliers  (and  20,000 employees)  wouldn’t   like  to  see the Fonterra  Shareholders  Fund  shareprice    matching  A2  Milk’s?

There’s  plenty of  scope for  Fonterra to  put  its  brand   up there  where it  belongs  by  searching out a  product  which  could be  marketed,  as   A2 Milk does  with its  infant  formula,  as providing  special health benefits.

Hurrell  framed the  back-to- basics  strategy   which   has   turned  the  co-op   around.  In  the  face of the  convulsions  the  Covid-19  pandemic has inflicted  on  the  global economy, Fonterra is  holding its  own.

Since   dairy is  the  staple of  many  global  diets,  Fonterra   can  confront   the challenge    with its ability  to move product to, or away  from, markets,  however they are  impacted  by Covid-19.

The   question  is  whether   Fonterra,  as the world’s  fourth-largest  dairy company, can seize the  moment  and  out-muscle  its  competitors.

Down on  the farm,  individual   producers  have  their  own  challenges  looming.  After being pilloried  for too long by urban lobby   groups  through  hostile innuendos  like  “dirty dairying” they  may  be  unwilling to cast  themselves  in the role of  national  saviours.

Yet,  they  can  do so  (and serve  their  own  interests as  well)   by  taking  fresh  initiatives   to  lift their own  productivity.    Just  as   Fonterra  has  simplified   its  structure,   so too  can  the  individual farmer  in his own  operations,  adopting   the  newest   techniques  in  breeding  and  in pasture management.

It  may be  disappointing  that the government is  not   doing its  bit  for   the industry —not that  farmers expect  any of  the helicopter  money  the  coalition is  spraying  over  other sectors — by (for example) using its weight  through  monetary  policy to push down  the exchange  rate,  so lifting   export returns  in NZ  dollar  terms.  Or   even by   revising the policy  on  genetic science   to   evolve  more  productive  animals  or   grasses.

But   there is plenty  farmers can do  for  themselves   by  applying  the latest  technologies  to improve   yields.  Cows  already have  radio  frequency ear  tags that  can identify the animals as they  move into the shed — and now  there  is   Fitbit  for   cows,   which  is a new  way  for  monitoring  cow performance  and  cow  health.

Challenges   around  battery   life  have  been  a  problem,  but  newer networks,  including  5G, can  change that.

Leaders  in  the industry   aim to   breed  animals  that create  less methane and  lessen  the use of  nitrate for  each  kilo  of  milk solid   they produce.

 

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