The dairy industry has recovered some of its confidence, as its role as the backbone of NZ’s export structure has moved into sharper relief in the Covid-19 pandemic.
Rabobank’s latest quarterly survey of farmer confidence says it has improved from minus 32% to minus 23%, with demand for NZ dairy products holding up well since the previous survey in September.
The dairy industry over past seasons has been the target of urban critics for so-called “dirty dairying”, climate change warriors who want a reduction in methane emissions, and the government, which is implementing new freshwater regulations. Internally the industry was stricken with the financial woes of Fonterra.
Even now as the industry absorbs the evidence for greater confidence, it is not without strategic concerns. Most of these are focused on its Chinese markets following the problems being encountered by Australian exporters in the wake of retaliatory action by the Chinese government.
ANZ Bank economists, in a report to clients, have noted trade frictions remain high and NZ needs to continue to build relationships (ie cosy up to) with China so it can make concerns heard without putting the trading relationship at risk.
For the moment, however, Fonterra’s farmer-suppliers are absorbing not just the news that their co-operative has raised the payout forecast to $7 but also the evidence that its CEO, Miles Hurrell, is doing an outstanding job in re-directing the managerial and marketing skills of the organisation. The rise in the payout will pump an extra $200m into farmers’ incomes for the season.
It is not all smooth sailing. The impact of Covid-19 continues to play out globally and (as with other exporters) the NZ dollar at 70USc is over-valued. And Fonterra is keeping a watchful eye on Northern Hemisphere production.
Farmers are nevertheless taking heart that Fonterra is forging ahead again, not only in getting its financial house in order but also in sharpening its marketing. And if international prices continue to strengthen, who knows? Last season’s payout could be matched, or beaten.
Hurrell himself seeks to cool off expectations on that front.
“All the stars would have to align in all markets” for the co-op to go beyo nd its current forecast.”
Certainly by pumping $10.8bn into the NZ economy, Fonterra underlines its value to the country. And, of course, the dairy industry’s value to the economy has been strengthened by the performance of relatively new players like A2 Milk, Synlait, Open Country, and Miraka, alongside Tatua and Westland Dairy .
While China has recovered well from Covid-19, which has helped to strengthen demand for wholemilk powder , a key driver for the milk price, there was less evidence in other food-service markets of recovery. In China Fonterra has expanded its food-service business into another 13 cities, bringing the total number to more than 360.
Meanwhile on the other side of the world another issue looms for the international dairy industry: will the UK leave the European Union without a Brexit deal and what implications will that have for both the UK and EU dairy markets?
The dairy industries in both are heavily subsidised, and certainly most UK dairy farmers could not survive without the Brussels munificence.
And with the UK government pressing on with a stringent climate-change policy, it could trim farm subsidies. This would present an opportunity for NZ to re-establish itself in the UK market as a key supplier of dairy products, given its cost competitiveness.