Dairy data should delight Covid recovery monitors while discouraging industry detractors

Farmers  are   back in the  frame  as  the  backbone  of  NZ’s  export economy,  after the  Covid-induced collapse of  the foreign  exchange earning capacity  of the  tourist  and international education industries.  But  it  is not  only  the  rural  industries themselves which  are  scrutinising bulletins  on  the  prices  being  earned  abroad  for  commodities.  Those data have  become a  vital  item  for  New Zealanders eager  to  monitor the recovery of an economy  battered  by a  one-in -100  year  event.

This  week  the  ANZ  reported  its  world commodity  price  index   had  eased  0.2%  in September as lower dairy and meat prices were largely offset by stronger prices for logs and fruit.

In local currency terms the index fell 1.3% as the NZ$ strengthened by 0.6% on a trade weighted index  basis during  the  month.

Hard on the heels  of those figures came   the  results   of  the latest  Fonterra  global  dairy   trade auction  where  the   average  price   strengthened  to  $US3143  a  tonne  and  wholemilk  powder (which  plays a  significant  role  on  Fonterra’s payout to  suppliers)  rose  1.7%  to  $3041  a  tonne.

Volumes sold were about the highest offered in 2020 and the most bidders of the year showed up for the  auction. Butter, up 8.4% to  $US3561,  rebounded  from  the previous  auction.

Over the two last auctions prices are up 5.8% in US dollar terms and 7.7% in NZ dollar terms.

This signals   a   positive    start  to  the  new   season    and  some commentators  contend the outcome  underlines  the international  market for milk  products  has  shaken off the  impact  of  the  Covid-19  pandemic.

Westpac’s    senior  agri-economist, Nathan  Penny, says WMP prices topped the key psychological barrier of $US3,000/MT  for the first time since August, indicating a degree of confidence in the market.  Moreover, prices have firmed as NZ production hits its seasonal peak.

This is despite recent data suggesting a strong start to the season. August production is running 4.7% ahead of August 2019.

“All up, we remain cautiously optimistic on the dairy price outlook. The result overnight reinforces our $6.50/kg milk price forecast for 2020/21. If anything, the result introduces some upside risk to our forecast. In the short-term, strong New Zealand spring production still has the potential to put pressure on prices, although for now firm global (Chinese) demand is dominating”.

 Meanwhile  Tatua   Dairy  Co-op,  which  manufactures  specialised  dairy  products,   again  out-shone  Fonterra  with  its  financial  performance  in   the season  just  past. Its group earnings of $151m equated to $9.96 per kilogram of milksolids, before retentions for reinvestment and taxation. This was an improvement on $9.66 the previous year.

The company confirmed a cash payout to supplying shareholders of $8.70 per kilogram of milksolids.

It retained earnings, for reinvestment of $1.26 per kilogram of milksolids, equivalent to $19.1m before tax.

Tatua achieved group revenue of $381m, and earnings of $151m, in its financial results for 2019-20.

CEO  Brendan Greaney said the earnings the company held back for reinvestment would keep its debt levels in check but also go towards ensuring the business remained sustainable.

Plans include building a new wastewater treatment plant and an engineering workshop for staff.

“The big investment of those two is the new wastewater treatment plant which is $15m.

“It will ensure the water returned to the land, is as close as possible, to being as clean as what it was when we took it out of the ground.”

The new plant would be completed early in 2021.

Greaney said the company had a “weighty programme for the year ahead” to increase capacity to grow the business.

“To be clear, that’s not about processing more milk but adding value to the milk we have.”

The company had about 100 staff working from home shortly after the pandemic hit, in NZ, China, Tokyo and the US.

“I was really impressed with the way staff looked after each other and how they looked after the company.  They showed exceptional commitment in the most challenging times.”

There  is a  lesson  in that  for   those    who  denigrate   the  achievements  of  the  dairy industry  as a   mainstay of the  NZ  economy.