No worries over dominance of China

John Wilson9

Increasing world demand for dairy products creates great opportunities for Fonterra, chairman John Wilson says.

Fonterra is not concerned the China market is becoming too dominant, chairman John Wilson told farmers at the annual meeting of the Northland Dairy Development Trust in Whangarei.

In the 12 months to September 30, China took 25% of New Zealand dairy exports and 40% of Fonterra’s milk powder, amid total dairy buying from NZ of $3.2 billion.

BNZ economist Doug Steele told the meeting earlier Chinese buying of NZ merchandise exports had risen from 6% to 18% in five years.

“Normally we economists don’t see major shifts in export market shares, so this is a massive increase in concentration risk for a country,” Steele said.

“But no government really can tell exporters to desist or reduce.”

Wilson said Middle East and North African markets for NZ dairy products were growing at the rate as China.

“We have no concerns about China’s dominance at the moment. Its demand growth is real and our involvement is at all levels – ingredients, commodities, food service, and consumer products.

“The Chinese Government also respects our wide investment in many markets, dairy farms, growing of crops, processing knowledge, and scholarships.”

The forecast milk production in China this year had fallen short by perhaps 20%, creating a dairy products shortfall that Fonterra and other suppliers were filling, he said.

China had suffered a wave of virulent foot-and-mouth disease that had taken out millions of cows on small farms and the developing larger farms had not replaced yet the lost milk production.

However, the grain-fed herds of Europe and North America were responding to the high world prices and globally traded dairy products would increase from 50b litres annually to 90b in 2021, he said.

The best estimate of NZ’s production growth over that time was from 19b litres to 22b litres, so other countries from the European Union and Latin America would increase exports.

Dairy demand, however, was forecast to increase from 395b litres globally last year to 515b, which exporting countries had no chance of meeting, he said.

In 2016 the European Union dairy quotas under the Common Agricultural Policy would end and the so-called “green belt countries” like Ireland and the Netherlands would respond with increased production.

“It provides great opportunities for Fonterra, as we can access milk pools and get leverage with our skills and people,” Wilson said.

“That’s why we have made the investment in whey processing alongside Aware in the Netherlands, where the plant complex will take in one billion litres annually.”

NZ Milk Products (NZMP) was having a tough first-half financial year with earnings, which would be significantly lower than the first half in 2012-13, he said.

A graph of the margin difference between “reference products” like milk powder and “non-reference” products like cheese and casein was very sharply negative, which meant lower NZMP earnings.

“The effect on farmers of the impact on stream returns is relatively neutral, and we expect the situation to be temporary, but it is difficult to forecast when the margin might turn positive, which it has been for most of the past five years.”