NZ dairy industry’s biggest challenge is meeting methane gas emission targets

New Zealand dairy farmers are some of the most efficient producers of dairy milk in the world, and while the past year has been tough for many industries, the overall picture for dairy has been overwhelmingly positive.  Returns to farmers have been at record levels,. along with the economic contribution to NZ.

Dairy  export receipts are  nudging $20bn  a  year, up  from $4.58m  in 2000.

But  now  the  industry  is  facing  its biggest  challenge.

Dairy  cattle are  responsible  for  22% of  NZ’s emissions. Can  NZ  meets  its methane  emission  targets  without  slashing  the   size of the  national  dairy  herd?

The  threat of  global warming  has  become all too plain  to  New Zealanders  in recent weeks and the pressure  on   the  government to  act  is  mounting.

It  can’t   dodge  making  decisions  on  the  Climate  Change Commission  report  it  received   earlier this  year. But  its  proposals  could  have  a  severe  impact  on   the  dairy industry. Continue reading “NZ dairy industry’s biggest challenge is meeting methane gas emission targets”

McBride puts his stamp on Fonterra’s capital restructuring proposals

The big  dairy  co-op  Fonterra  has  moved to make  its  capital  restructuring  proposals  more  palatable  to  its  10,000  farmer-shareholders as  it  seeks to  slash  the  drastic entry  cost  to  become a  new  supplier.

Faced  with  a  future where  total milk production  is  flattening, Fonterra  needs    more  flexibility in    its  capital rules, the  most  burdensome of which has been the compulsory requirement to invest huge sums of capital just to supply.

The  revisions now   being  put  forward bear   the  stamp   of  chairman Peter  McBride, who  in an earlier role  successfully carried  the  kiwifruit  growers in   Zespri through   a  similar  capital  restructure.

McBride, after  taking  the chair at  Fonterra,  soon realised  the need for  change in the one-size-fits-all compulsory capital structure  requiring all shareholders to hold shares on a 1:1 basis. It  has become a  key factor in farmers deciding to leave.

Working  over   feedback  since  the first reform proposals were  outlined in  May,  Fonterra’s  board found several  themes emerging,  and   now sees  the need to  re-shape  several of  them. One of  the  main  worries revealed  in  the  initial  consultation related  to  the farmer-only market and its impact on the share price.

Changes being considered to the preferred option initially put forward  include adjusting the proposed minimum shareholding requirement for farmers and enabling share milkers and contract milkers to own shares.

A minimum shareholding requirement of 33% of milk supply, or one share per 3kg/MS, could be required. The preferred option had previously been 25%.

The entry timeframe for farmers to join the co-op could be extended from five to six years, while current shareholders would be given more time to exit – up to between 10 and 15 years from five years. Continue reading “McBride puts his stamp on Fonterra’s capital restructuring proposals”

Farmers contribute much to NZ’s balance of payments and our standard of living – but some ministers don’t grasp this reality

Global  prices for New Zealand products  from the  agricultural sector, as measured on the ANZ Commodity Price Index,  have risen for eight consecutive months to hit a  new  record in May.  Prices on the world index  are  up 18% this  year, or 17% in  local currency terms.

Some  economists are predicting more  rises  are  in  store  this  year.

The  gains  have  gone  some way in the  balance of  payments to offset big losses on  the  foreign  currency  front  from the overseas tourism and   international education sectors.

Westpac senior agri-economist Nathan Penny says being a food producer has been positive during Covid-19 as people still need to eat in times of crisis.

NZ   has  also  benefited because its key Asian markets handled Covid-19 well and got their economies back up and running quickly, ensuring resilient demand for our products that is pushing up prices. Continue reading “Farmers contribute much to NZ’s balance of payments and our standard of living – but some ministers don’t grasp this reality”

Look who’s singing the farm sector’s praises – none other than the Minister whose environmental rules constrain them

Labour ministers  are   beating  the farming  drum  (as never before).

On  stage  at  the Fieldays at   Mystery Creek, one of  the  first  out of the block (given the  absence  of Agriculture  Minister  Damien O’Connor  negotiating  free  trade  in London with the UK)  was  Oceans  and  Fisheries Minister David  Parker. 

He  was  singing  the  praises of  the  sector,  which  might have come  as a  surprise  to  many  within the  farming  industry,  who  have found  the strictures  he has delivered from his Environment  portfolio  rather  hard  to  digest.

Parker   used  the  Fieldays platform to  talk up  the sector which  he  declared had performed remarkably well in the face of Covid-19.

“NZ’s farmers, growers, fishers, processors, makers, and crafters have risen to the challenges that 2021 has presented”.

Farming exports are forecast to hit a record $49.1bn, up 3.4% over the next year, and The Situation and Outlook for Primary Industries report says by June 2025 the sector’s exports are forecast to reach $53.1bn. Continue reading “Look who’s singing the farm sector’s praises – none other than the Minister whose environmental rules constrain them”

How morale among our food producers is flagging in the face of Covid fatigue and Ardern’s regulatory agenda

KPMG’s global head of agribusiness, Ian Proudfoot​,  reports morale in  NZ’s farming  industries has slumped over the past year, with industry leaders struggling under the pressure.

“We could sense anger during our conversations, particularly in relation to the labour shortages the sector faces”.

Proudfoot is the  author of  the  KPMG “Agribusiness Agenda” , delivered at a   breakfast session at the opening  day  of  the  Fieldays,   billed  as the  largest agricultural event  in  the  southern  hemisphere.

He  believes  NZ’s role in a global “food renaissance” could be hampered by Covid-19 fatigue and sweeping regulatory changes.

That  presents   a  huge  challenge  for  any  government – particularly  one  that  has  been   perceived to be no  friend  to farmers. Yet Prime  Minister  Jacinda  Ardern put  on a  bold  front  when she  and  several  of  her  ministers appeared  at  Mystery  Creek.

Only  a cynic  would  suspect  she sees  an  opportunity  to  sustain  the strength  of  Labour’s  resurgent  vote  among  rural  communities  at  the  last election. Continue reading “How morale among our food producers is flagging in the face of Covid fatigue and Ardern’s regulatory agenda”

The climate-change dilemma facing dairy farmers – milk more cows or cull the herd – is politically challenging, too

From one Wellington  platform  Reserve  Bank governor Adrian  Orr is  telling  the  country   strong global demand for NZ primary products is ensuring the economy remains resilient during the Covid-19 pandemic and is helping offset tourism losses. He  says  Fonterra’s  forecast  of a  record opening milk price is “very good news” and is included in the bank’s projections.

From another platform, Climate Change Commissioner Rod Carr told hundreds of people – including farmers – at an agricultural climate change conference that for the agricultural sector there would be no way to wriggle out of slashing emissions.

Carr said agriculture made up about half of NZ’s emissions, and this needed to be reduced to meet climate obligations.International customers would go elsewhere, costing the economy billions of dollars in the coming years.

So  here’s  the  problem:

Should  dairy  farmers  be  planning to  milk  as  many  cows as  they  can  next season —  or should they be  sending animals to  the  works  to  cut emissions? Continue reading “The climate-change dilemma facing dairy farmers – milk more cows or cull the herd – is politically challenging, too”

Budget pumps $1.3bn into railways but almost forgets farmers while Fonterra delivers the economy-boosting goods

Farmers    who  believed   Labour  when it  said  it wanted  to  double  agricultural  exports may have experienced  a  sense  of  disillusion as  they  absorbed the  messages  of  Budget 2021.  While  the  government  is  allocating $1.3bn to modernise rail infrastructure and  build locos  and  wagons in Dunedin,  it  could find  only  $62m  for  agriculture.

Someone  has  calculated  that  the country’s 40,000 farm businesses, if they shared the $62m, would each receive $1550 or $29 a week (less than the ongoing minimum benefit increase).

This  comparatively meagre  sum   is  to be  applied as  follows:

  • $37m towards a national integrated farm planning system for farmers and growers.
  • $24m towards agricultural greenhouse gas mitigation research and development.
  • $900,000 to collect vital statistics on agricultural production, such as greenhouse gas emissions.

Critics may  conclude   the small outlay for agriculture reflects Agriculture Minister Damien  O’Connor’s influence in Cabinet.  Others  may  see it as  evidence  of the traditional antipathy of Labour MPs  towards  farmers. Continue reading “Budget pumps $1.3bn into railways but almost forgets farmers while Fonterra delivers the economy-boosting goods”

Farmers may not get much from the Budget but prospects are looking good in export markets

The agriculture sector may not get the recognition it deserves in this year’s budget, nor much assistance along  the  road  to  reducing  methane emissions — but  at  least farmers  can take  satisfaction (as New Zealand  emerges into  the  post-Covid  era)  that  returns   for the  bulk of the  sector’s output  have  been  strong.  The prospects are that high prices for  most products will be  sustained  next season.

The latest  Global  Dairy Trade  auction this week saw prices  easing  slightly—but  for  the product  that bears  the  greatest influence  on Fonterra’s  farmgate milk price, whole milk powder, it is still 54%  higher  than  at this time  in the  previous season.

Analysts are confident it will stay around that  level next season.

The other encouraging sign for primary producers  is  that  prices  in the  meat  sector  are  buoyant.  This  week  Westpac lifted its farmgate lamb forecast to at least $8/kg, and sees it possibly rising to over $9. Continue reading “Farmers may not get much from the Budget but prospects are looking good in export markets”

Tough choices for Fonterra’s farmer-shareholders – and getting them right is important for NZ’s economy

The proposed  reform  of dairy giant Fonterra’s  capital  structure  has rapidly become a  critical issue, not  just  for  the cooperative’s 10,000  farmer-shareholders, but also  for  the  country’s economic wellbeing.

The  decisions  to  be  made  have  been thrown into  sharper   focus by the  crash in the  fortunes, as  evaluated by  investors,  of  other  listed dairy  companies, A2 Milk  ( its  share price  is down from its  peak of  $20  to  just  above  $6)  and  Synlait  (down  from $7.56  to  $3.17).

Fonterra is a complex business. Its co-operative structure, its vertical integration, its sheer size in the market, the fact it is reliant on not one but several commodity price structures, all combine to make the company, as one  market analyst  put it, “like a machine with a million moving parts”.

Its  founders  20  years  ago believed it  would  rise  to   become  a  global  leader. But  there has always been  a fundamental tension within its  co-op structure between  the  need to  maximise returns  to  its  farmer  suppliers,  as  at  the  same time  as it  should be maximising funding  for   investment in  new  plant  and in R&D.

Spending  on  research  has  been relatively miserly:  where market  leader  F&P Healthcare  outlays  around  9%  of  its  revenue  annually   to  R&D, Fonterra’s  R&D spend  can be as low  as  1%  of  its $20bn revenue.

Chairman  Peter McBride,  who’s  driving the  proposal for major  structural   change,  has  a hard  row  to  hoe. The aim is to balance farmer ownership, milk supply, and secure its financial future.

Among the options put out for consideration are dual-share structures to allow outside involvement, splitting the co-op between supply and processing businesses, and different classes of shares.

McBride presents   the  case  for a capital structure review on   the  need to ensure the sustainability of the co-operative into the future.

“The co-op’s future financial sustainability relies heavily on our ability to maintain a sustainable NZ milk supply and protect farmer ownership and control.”

Capital structure options the co-op is consulting on:

  • Dual share structures, which would move from the current single co-operative share to a compulsory supply share and a separate non-compulsory investment share
  • Unshared supply structures
  • A traditional nominal share structure
  • A split co-operative model

McBride says to allow Fonterra’s farmers to have open conversations and consider all options during consultation, it is temporarily capping the size of the Fonterra Shareholders’ Fund by suspending shares in the Fonterra Shareholders’ Market from being exchanged into units in the fund.

“The decisions we’ve already taken in response to the findings of the review – like temporarily capping the size of the fund – haven’t been made lightly,” he said.

Some of the options the co-operative is asking its farmers to consider included buying back the fund.

If the temporary cap was not in place, anyone holding “dry shares” – these are shares held in excess of the “wet share” requirement linked to milk production – would have been able to exchange them into units in the fund during consultation.

That could have more than doubled the size of the fund and made the option of buying it back unaffordable in the context of the co-operative’s current balance sheet targets.

Fonterra said it believed the best option was move to a structure that reduced the share standard so farmers had greater flexibility,  either remove the fund or capping it from growing further to protect farmer ownership and control.

That would make it easier for new farmers to join the co-op and give more flexibility to existing farmers who may want to free up capital or who were working through succession.

“A key outcome of this change is that shares would be bought and sold between farmers in a farmer-only market.

“These changes could impact the price at which shares in our co-op are traded, and there may not be as much liquidity in the market. Ultimately the price for farmers’ shares would be determined by the performance of the co-op and trading between farmers.”

Fonterra said it believed that was a more sustainable proposition over the longer term than the alternatives confronting it.

 So why  is the co-op is looking at alternative capital structure options?.

Fonterra says the environment in which it is operating has changed significantly over the last decade.

It needs to be prepared for flat or potentially declining milk supply as a result of factors such as climate change impacts, regulatory changes, and alternative land uses.

Declining milk volumes or more flexibility for farmers’ shareholding requirements could cause the fund size to grow significantly, Fonterra believes.

That would mean the thresholds that were put in place to help protect farmer ownership and control could be exceeded within the next few seasons.

Over the coming months, the co-operative’s farmers are being given the chance to share their views through a series of meetings, webinars and other forums.

One  argument in  favour  of the proposed changes  is that they may suit young farmers wanting to join the co-op.

But   more  conservative  elements   within the industry   argue  that  older  suppliers who  bought   shares when  they were  relatively  high  are  confronted   with  market  prices   that  are  declining.

McBride  will  need  all  the  skill  he  deployed  when  in a  previous  life  he  reorganised the  kiwifruit’s  industry structure  to  get the  75% support required to shove any change across the line.

Some  complicating  factors  have been  cited   by Arie Dekker, head of research at investment house Jarden Securities, who says Fonterra shareholders need to think closely about scrapping the fund, which is the only avenue for non-farmer investors to have an exposure to Fonterra’s business.

“It is one of the largest sectors of the economy and Fonterra is clearly one  of the largest corporates.”

Dekker said the fund had benefits for farmers, by giving them a way to discover the value of their shares without giving up ownership of the co-operative.

He believes it would be a “shame” for retail investors to lose out on investing in one of the country’s largest companies.

Fonterra  in  his  view should be looking to sell more overseas assets to recoup capital.

It has sold much of its China investments, joint ventures in Latin America and Europe, but retains interests in Australia and Chile.

As  McBride  says,  the  compulsory  nature  of  capital  can  be  a  strength  in  a  co-op,  but it  can be a  weakness, too.

“Compulsion  is a  real issue here. When  you provide optionality  or  choice, you can’t  sustain the  model we have.

“We  would  like to provide  choice for a  diverse group of stakeholder  farmers, but  at the  same  time  we have a  framework  for  a  fund that  could blow out   and  we  could lose control of it,  or  we  could  have to be  dishing  out significant  capital  to  maintain thresholds”.

Tough  choices,  clearly,  for  farmer-shareholders—and  if  they  don’t  get  them  right, it  could be the  end of the  dream of  Fonterra  becoming a world-beating national  champion.

Two big announcements awaited from Fonterra – one deals with dairy payout, the other with the co-op’s capital structure

So what  are  the  chances Fonterra’s  payout  to its farmer-suppliers  could  top  $8kg/MS the  soon-to-end  current  season?

That would give a  timely  boost  to  the  rural economy  and give  farmers  the kind  of  surge  in incomes  which  would encourage them  to  step up the  pace  of  adapting their dairy farming practices as  the  country  moves  to meet its  climate  change goals.

In March, Fonterra raised its forecast milk price for this season to between $7.30 and $7.90kg/MS with a mid-point of $7.60. That was up from $7.14 last season.

But now, after several  good  results  from the fortnightly GDT auctions, and indications from futures contract prices, the  speculation  is that the payout  could go  higher.

While the GDT index slipped 0.7% at the latest auction this week, the price of whole milk powder, which has the most impact on what farmers are paid, gained 0.7% to an average US$4115 (NZ$5756) a tonne while skim milk powder, the second-most important, rose 2% to US$3433/t.

Butter prices slumped 12% to US$5035/t, weighed down by extra volume on offer. Continue reading “Two big announcements awaited from Fonterra – one deals with dairy payout, the other with the co-op’s capital structure”