There have been increased murmurings in the local press as to the impact of a possible exit of Britain from the EU. This scuttlebutt has been enough to encourage talk of a return to the pre-1973 glory days, when the Commonwealth countries were seen as the food basket for old Blighty. In the case of NZ, Britain was the principal destination for most of our lamb and butter exports.
While lamb sales have continued, albeit on less favourable terms, the butter trade into Britain or indeed Europe, can be described as sporadic at best. New Zealand retained a historical quota of about 76,000 tonnes to enable butter sales on a biannual basis, subject to a tariff of €700.
Despite the large hurdle the sales channel was often useful towards the end of each calendar year when Fonterra (and indeed Westland) was moving through their peak milk and European production was at its seasonal low.
Of course, given the dependence on an arbitrage opportunity it was difficult to offer regular supply to customers and therefore maintain ongoing relationships in order to capture the entire value in the spread when the opportunity arose.
In recent years European fat has tended to trade at a significant premium to NZ-origin butter, but after the introduction of 2014 Russian trade sanctions, that spread has certainly narrowed. With a 260,000t cheese market now essentially closed it was important Europe found an alternative market for that milk.
In order to utilise the safety of the European IV programme the milk was moved away from the cheese vats and into the dryers and churns. SMP has already triggered the support mechanism and given the direction of the butter market it looks like it will not be too long before there are fat contributions into intervention as well.
United Kingdom farmers have had a tough time of it recently (although they are not alone) with the number of dairy farmers effectively halving over the past 10 years. In a borderless Europe, milk from the Continent and Ireland has been sufficient to pick up any deficit in local production, but it is unclear how that would progress should Britain be once again an independent island (and not just in the physical sense).
The potential opportunities for New Zealand are obvious, especially in this precarious environment, but of course are not a given.
There would need to be a number of steps to go through before this could possibly come to fruition, but the New Zealand dairy industry would at this stage be more than happy to grab any straw that happened to float by.
In summary we would need the UK to vote to leave the EU, for them to instigate a free trade agreement with NZ, for European butter to pop in price (probably as a result of Russia lifting sanctions) and for NZ to have sufficient butter to meet the demand on an ongoing basis.
Perhaps a long bow but maybe now is not the time to considering taking the Union Jack off our flag?
Mike McIntyre, Head of Derivatives, First NZ Capital Securities Limited
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