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.