It’s been a great year for the dairy industry – now let’s see what it has done for Fonterra’s books

Despite  the  turmoil  inflicted  on  global markets,  NZ’s  dairy  industry  turned  in  a  phenomenal performance   for  the  2019-20 season,   with  export  earnings   $709m  ahead of  the  previous  year.  

And  though  the  global  market  is  finely  balanced  at  present,  the  prospect  is  that  the  industry  could  again  be  ahead  of the  pack  in  the  current  season.

Dairy farmers    deserve  the  plaudits  of  the   rest  of  the  country,  even   though  the  present   government    has  gone  out  of its  way  to   clobber  the industry  with  tough  freshwater regulations  designed to  satisfy  “dirty dairying”   critics,  despite the most polluted water  often being  found in  city and town waterways  and harbours. 

With the  loss of  foreign  exchange  from  the collapse  of  the international tourism and education, the NZ  economy is  more than ever  dependent  on the primary sector  to  increase output  for  sales  abroad.

Now,  as  dairy farmers   settle  into  the  new  season, those    who  supply  Fonterra  will be  looking   to the big  co-op  reporting  its  annual  result  on  September  18,    with  confirmation    of  its  final farmgate  milk price  for  the  2019-20  season.  This is  expected to be  $7.15kg/MS.

For the  current season, Fonterra has indicated it is maintaining the previous forecast range of $5.90 – $6.90 kg/MS   with the  advance rate set off the mid-point of $6.40kg/MS.

In a  recent  report  ANZ   economists   said global dairy markets are in a much stronger position than they earlier expected. Sales of the production using the milk that will be delivered by farmers in the 2020-21 season are really just getting under way. Until this product is actually sold there remain massive risks that the milk price could swing away from current forecasts. 

The good news is that the market is currently in a much stronger position than it was a few months back and this bodes well for those negotiating forward contracts”.

 Other  authorities   have  also pointed to   positive signs for  the  NZ  dairy export trade. The ability to trade dairy commodities has been helped because of the flexibility in product mix and country placement. 

Population growth and growing per capita incomes internationally are driving increased consumption of dairy products. Production of fresh milk is expected to grow by over 2%  a year until 2028. The Chinese market – NZ’s most important customer – is still growing,.

Fonterra’s  September   18   announcement   will   be  keenly  studied   not  only  by farmer-shareholders but  also  more generally    for  signals  that  the  big  co-op  has  recovered   its   own  good  financial  health,  after  the  losses  it  registered  in the  previous two   seasons.

It  reported  a  $500m   profit  in  the   first six  months,   and  farmer-shareholders  will be  looking for  a similar  upswing  in  the second half,  as  the  reformed   strategy   being implemented  by  chief  executive   Miles Hurrell  takes  full  effect.   

Fonterra meanwhile has cautioned farmers  to be  careful   with on-farm  financial  decisions.  That’s  not  surprising given  the uncertain international  outlook,  with  economists  warning of a  global slowdown.

Yet   when  dairying  has  become  such a vital component  in maintaining  the  country’s living standards  somewhere  near  where they were  before Covid-19  struck, Point of  Order  contends it  is  in  the  national  interest  for  all  those  involved,  from  the government  down,  to be  promoting  innovation in the  industry,  from  robotic  milking machines to  gene editing,  in  order  to  increase efficiency, lower  costs  and  increase  production. 

The  top  echelon  of  NZ’s  dairy farmers   are  highly  efficient,  with  many  in that  group averaging  less  than $4kg/MS  in  the  cost  of  production. 

But  the  problem  is  that  rural  confidence  has  been    severely  dented  by  such   government regulatory  measures,  as    with its  freshwater   rules  and  the Zero  Carbon  legislation.The freshwater regulations  are  said to have the aim of preventing further: “loss and degradation of freshwater habitats and introducing controls on some high risk activities”. 

The industry claims this could cost NZ “$6 billion per annum in GDP losses by 2050”.

Against that blow to rural  confidence,  farmers   can  take  heart  from  the evidence  that  their  industry  is  well  placed    to  take  advantage  of  the expanding  Chinese  market  for  dairy products.

A study  by  NZIER  indicates Chinese consumption per capita is still small relative to other parts of Asia and the world (roughly one-third of world averages). Despite this the growth has been dramatic – per capita consumption has doubled in 10 years.

 It  says the UK exiting the EU is also likely to change dairy markets since it is the second largest dairy importer after China. While there  is  uncertainty how NZ producers will take advantage of this market any increase in international demand will have a positive impact on world prices.

How NZ might gain will become clearer as the FTA with the UK takes shape.

For these reasons – particularly growing per capita consumption and population growth – it is likely that demand will be strong for dairy products over the next ten years”.

 The   NZIER  study   concludes the Covid-19 and post-Covid-19 periods look bright for the dairy industry in NZ.

Demand is still growing and the ability to deliver consistently high-quality products from a trusted source (with transparent regulatory oversight) means that real prices might not increase dramatically, but they are unlikely to decline over the next ten years….The challenges for NZ dairying are on the supply side”.   

NZ  can  exploit   its advantage  with low cost wholemilk powder    against  its  subsidised  European and  US competitors,  who  rely   heavily  on consumption  of butterfat products. Demand  for  cheese  and  butter is falling   internationally because the Covid-19 pandemic  has virtually shut down the hospitality business globally.

So  it   shouldn’t  be  just  the  co-op’s  farmer-shareholders cheering  if   Miles  Hurrell  can show  on September  18  he has  got  Fonterra’s  strategy  right,  but the  rest of the country as well.

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