The regular commentator on the primary sector was writing in the KMPG Financial Institutions Performance Survey for 2016.
He claimed that a milk price upswing driven by a rise in commodity prices meant that nothing of substance had changed and New Zealand’s vital dairy industry was exposed to the next slump.
Proudfoot claimed a growing acceptance among dairy farmers that simply producing more milk was not the answer to growing value in the dairy industry.
The sustained period of low prices, perhaps for the first time for some farmers, had forced a focus on the fundamentals.
“Many farming businesses are run more effectively today than they were three years ago.”
He cited Synlait’s Munchkins contract and the Lewis Road success in getting consumers to pay for what NZ had taken for granted.
“They have made good progress on seeking to monetise the unique attributes of our dairy system.
“But I am not convinced this progress will continue ‑ it may be parked until the inevitable return to poor milk prices.”
Proudfoot called for motivated farmers, researchers, and other “change agents” who would be prepared to stand up to complacency.
“They will progressively detach the industry from the peaks and troughs of the commodity cycle and accelerate the arrival of a more prosperous future for our country.”
NZ ran the risk of being left behind as new export competitors emerged – such as a cultured milk product without the environmental and welfare challenges associated with animals.
“We must grow a lot less milk to enable processors with a greater ability to produce and deliver value-add products.”
Dairy industry leaders said it would be hard to find any NZ farmer that would disagree with the value-add ambition.
Fonterra chairman John Wilson said growing milk production and adding value to dairy products were not alternatives.
“Our farmers are very productive but they are always going to be on the grass curve, for which we need at peak production highly efficient milk powder driers, producing what a large number of our customers want to buy.”
Wilson pointed to the 20% of total milk going into consumer and foodservice products, equivalent to five billion litres.
Foodservice and consumer sales had grown by 15% and 5% respectively last financial year.
That value-add volume had grown by one billion litres over the past two years, and Fonterra’s target was 10b in 2025, plus its considerable volume of value-add ingredients, which were not just basic commodities.
He had no doubt that NZ milk volumes would quickly return to 2015 levels, given normal weather conditions, and Fonterra had to be able to process that peak production.
NZ farmers had done a superb job throughout the difficulties of the past two seasons, which had been caused by extraordinary one-off events like China’s milk powder buying, the end of European dairy quotas and the Russian trade embargo.
The recovery of world dairy markets to “balance” at about US$3000-3500/tonne whole milk powder produced a farmgate payout of $6 to $6.50/kg milksolids.
Fonterra farmers could have confidence that was sustainable because of low-cost milk production, most-efficient processing and supply chain management, and added value through innovation.
Wilson partly agreed with Proudfoot when he called for the repeal of the Dairy Industry Restructuring Act (DIRA).
Proudfoot said it was sustaining uneconomic and environmentally marginal milk supply. This would expose the dairy industry to the same overcapacity that had plagued the red meat industry for 20 years, he added.
Instead of building processing capacity for growing milk peaks, capital had to be redirected into brands, consumer experience and NZ product differentiation.
What Wilson called the frustrations of DIRA legislation had potentially exposed the co-operative to overcapacity.
Open entry and exit was well past its use-by date, certainly since Fonterra had a robust milk price mechanism and Trading Among Farmers.
The requirement to pick up all milk had driven the development of some ecologically fragile land, Wilson agreed.
“A farmer has to do no more than think about converting more land, growing his milk supply, or coming back to Fonterra, and the board has to ensure that we have the processing capacity for him.
“That is patently ridiculous, because all farmers carry the underwriting cost of that, and it does bring the potential of stranded assets.
“I say potential, because we are not there yet.”
DairyNZ chief executive Tim Mackle said that more cows and more milk was only one of the options facing the NZ dairy industry, and individual farmers.
“There are areas of the county where, for various reasons, we can’t have any more cows while other areas can have more, if the increase is managed correctly.
“The Land and Water planning process is the basis for that discussion, as long as the engagement with the community is based on objective science.”
Mackle agreed that farmers and those who support them have come through a major slump and that there were lessons to be learned.
“There will be another, but it doesn’t have to be as difficult if in the meantime we use what we already know to future-proof farm businesses.”
DairyNZ would find those farms that came through the downturn well and publicise their structures and methods.
Recovery was well under way and the DairyNZ break-even milk price had risen, as farmers fed more supplements and did some deferred repairs and maintenance.
“Overall, the job is not done yet of getting our businesses into a strong and resilient shape,” Mackle said.
