Dairy farmer confidence is improving but there are challenges in export markets

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.