On the face of it things are looking up for the new season with rural economists predicting a starting price somewhere north of $7/kg MS.
But Fonterra, on the back of narrowing its 2018-19 forecast to the bottom end of its range at $6.30 to $6.40/kg MS has given a wide range for this season of $6.25-$7.25. Though the economists are optimistic Fonterra has set the advance rate at only $3.80/kg MS.
And we still don’t know any detail for Fonterra’s new strategy but we can take it from chief executive Miles Hurrell’s comments accompanying the third quarter results that it won’t be plain sailing for a couple of years yet.
He’s asking farmers for patience at a time some of them say it’s wearing thin, especially as what we have seen so far of the strategy it seems to involve flogging off assets to pay bills, which is a short-term gain for long-term loss of potential revenue.
In the case of Tip Top it might seem Fonterra is selling the family silver to pay its debts but Hurrell said Fonterra is in no position to realise the ice cream maker’s potential. Pity.
Talking of short term gain it’s been a long, slow, debilitating illness for Westland but now nurse Yili has arrived and each farmer will apparently get a cash infusion of $572,000, according to ANZ analyst Susan Kilsby.
But that might be a way off given the speed at which the Overseas Investment Office moves.
Yili has promised farmers a milk price as good as Fonterra’s for 10 years but some farmers taking a longer view are worried about what happens then. And if they decide to move to Fonterra the payout will go in sharing up.
Synlait is now in an awkward position with its Pokeno plant. The former owner of the land sought compensation because the plant was built in breach of covenants he put on the title. However, after the High Court removed the covenants in November the Court of Appeal has reversed that decision.
It actually refused to award compensation saying the issue could be resolved by reinstating the covenants, which it did.
Synlait has now received a cease and desist notice though chief executive Leon Clement previously said the firm is confident it will find a solution. That presumably means paying the complainant to go away but whether that will breach the appeal court’s ruling will no doubt be debated by the lawyers. Look for this to head back to court.
Perhaps the most intriguing issue now facing the dairy industry is the outbreak of African swine fever in the Chinese pig herd.
This will have implications for the dairy sector but it’s not a simple job to work out what the outcome will be when they all come into play.
For a start the Chinese are culling huge numbers of pigs, maybe more than 200 million. That leaves a protein gap. They will turn to other meats such as beef and lamb, particularly beef and that could lead to more culling in dairy herds around the world and constrain China’s dairy production.
However, it’s complicated by the United States-China trade war.
With the two countries ramping up tariffs on each other’s good that might look good on the face of it for New Zealand meat exports to China. And that might well be the case.
But it will mean American farmers lose a big export market in China.
They will find themselves in an environment where plenty of feed is available because a lot of that won’t be going to China, either for pigs because of lower demand or because of the tariffs making prices prohibitive.
Combine that with President Donald Trump’s promise of another $16 billion of subsides, though he calls it compensation, to make it up to farmers losing sales in China and those producing the feed will be able to sell it cheaply to dairy farmers and we know American dairy farmers are exceptionally good at responding to cheap feed by ramping up production.
But that’s not all.
China’s pigs eat a lot of dairy-derived feed in their rations. The swine fever means demand is plunging and the tariffs are making American products uncompetitive.
In the last few years China imported 530,000 tonnes of whey and permeate and 84,000 tonnes of lactose a year, about half from America and most of the rest from the European Union.
Rabobank says this might be just the start of weaker whey and lactose prices. Dry whey futures on the Chicago Mercantile Exchange have fallen marginally to US$850 a tonne but the reality, the US Agriculture Department says, is dry whey trading at less than US$550 a tonne on the spot market.
The effects will flow through to farmgate prices and could last for years, Rabobank says.
