Testing times for NZ’s dairy industry: Can its leaders find the right formula?

Dairy giant Fonterra has taken a hammering in the media in the wake of its disclosure it expects to report a full-year loss of as much as $675m and won’t pay a dividend as it slashes the value of global assets. It will be the second annual loss in a row.

Investment guru Brian Gaynor in the NZ Herald argued Fonterra’s farmers have drained the co-op almost dry in terms of milk prices and dividends and have left it in an extremely vulnerable position. Earlier another Herald columnist, Matthew Hooton, contended NZ has put all its milk in one pail – in a company with inadequate governance and capital to match its aspirations.

Lopping the OCR might be a stroke of genius – or an Orr-ful monetary policy blunder

So what, on reflection, are we to make of  the  Reserve  Bank  governor  Adrian  Orr last week slashing the  official  cash rate  by half a percentage point to  a record  low  of  1%?

After  all,  just  the day  before  Orr made his   historic move, Finance Minister   Grant  Robertson  was  delivering  assurances  to  anyone  who might be listening  of  the  NZ  economy’s “solid fundamentals” as  he celebrated the unemployment rate falling to 3.9%.

Why then would   investment  guru Brian  Gaynor  label the  OCR  cut  as a “bizarre  decision”?

In his  widely read column in the  Saturday  edition of the NZ Herald, Gaynor wrote:

“Populist politicians and central bank governors  are obsessed with taking  measures to avoid any  form of  economic slowdown. This  approach, which has been strongly  influenced  by Trump’s  pressure on the US Federal Reserve Board, is unorthodox, because  expansions and  slowdowns  are  an  integral  part of the  business  cycle. The  weird  0.5%  rate  cut…means  our Reserve Bank has more limited options if NZ is  confronted  by a  serious  recession”.

Questions are raised about the PGF and its promise of provincial rejuvenation

Regional  Economic  Development  Minister  Shane  Jones has  one of  the  great  jobs  in  modern  NZ   politics.   He’s  in   charge  of  spending the  $3bn  Provincial  Growth  Fund,  which  NZ  First  extracted from Labour  as   part of  its  coalition  negotiation.

Already  $2bn   has  been  committed,  and  the fund  is expected to allocate  the  remaining  $1bn  before  next  year’s general  election.

Job  done.

And  the  provinces, the theory goes,  will be  so grateful   they  will ensure   NZ  First  gets  back  to Parliament to  deliver a  repeat dose  post- 2020

Or will  they?

Shane Jones has  certainly  generated a  constant  flow of  headlines,  but  will the benefits to the provinces  yield  sustained  economic development,   and  produce a  renaissance  in the  provincial  cities?  Will  the   economic  benefits  be  solid  enough to  filter down to  the  average  resident  in the  supposedly  deprived  regions?

Yili bid for Westland Milk raises questions about dairy co-operatives – and Fonterra’s ownership

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On  the face  of  it, it’s  a  no-brainer.  Weighed  down  with  debt,  Westland  Milk,  based in   Hokitika  is financially  on  its  knees.  Riding  to  its  rescue,  Chinese  dairy  giant  Yili  has come in with a  $588m buyout deal   which  will yield  $3.41  a share   to the co-op’s  farmer shareholders,  and, as well,   absorb  Westland’s debt and liabilities.

According to  Westland, the  nominal value of its shares  has ranged  from  70c  to $1.50  per share. For the  average-sized  Westland farm, the  share offer translates to  about half a  million dollars cash.

The offer  looks even  more attractive since  Westland had to  cut its  milk payout  forecast, while other  companies’ forecasts  are rising.  Westland, which has  grown out of  the West  Coast’s  150-year  dairy heritage, hasn’t paid  a  competitive milk price   for  several years.

The conditional  deal comes with extra  sweeteners. Yili has committed to collect all  milk  supply. It  will  also pay  a  competitive  price of at  least  as  much as  the  Fonterra  farmgate milk price   for  10  years.

But why  would   Yili   go that distance?