Searching for the future on the North Island hills

Some weeks back I wrote an article on New Zealand’s sheep and beef farms, focusing on the current situation. I said I would be back as there was more to discuss about both the present and the future. Here, I want to focus more specifically on the North Island hill (Beef+Lamb Class 4) and hard-hill country (Class 3). These land classes comprise around 4000 farms and contain approximately 45 percent of New Zealand’s commercial sheep and beef farms.

Before heading further down that track, I want to share some information supplied by Rob Davison from Beef+Lamb. The 2017 Statistics Department national census indicates there are approximately 26,400 sheep and beef farms in New Zealand. However, Beef+Lamb estimates that only 9200, or 35 percent thereof, are commercial farms. These commercial farms typically have at least 750 stock units and comprise 97 percent of New Zealand’s sheep production plus 88 percent of the beef cattle production. That means there are another 17,200 lifestyle and hobby farmers.

Fonterra’s restructure proposal risks the co-operative

Fonterra’s decision on 6 May to present an alternative capital structure has opened a can of worms.  The shares have dropped around 15 percent and investor units are down 13 percent. There are no immediate cash implications, but Fonterra’s capital value has declined by more than $1 billion. This transfers through to farmer balance-sheets.  Given that this is just a proposal, the market response is remarkable.

There is close to zero chance that the proposals will be implemented in their present form. But the worms cannot be simply put back in the can. Fonterra has made it explicit that its current structure is no longer fit for purpose.  Those are not the exact words that Fonterra is using publicly, but they are the exact words coming in on the breeze.

Fonterra heads towards a new capital structure with scope for unintended consequences

Fonterra’s latest proposals to change its capital structure will be far reaching. If implemented, they will essentially undo the misleadingly named ‘Trading Among Farmers’ (TAF) system set up in 2012. I say ‘misleading’ because in reality that was a scheme of trading between farmers and non-farmer unit investors. But the proposed changes do not stop there.

The second part of Fonterra’s proposal is to allow Fonterra’s shareholder farmers to hold as little as one share for every four kg of Milksolids (the ‘capital M’ as sometimes used by the industry reflects that it is actually fat plus protein and ignores other solids) that are supplied, or as much as four shares for every kg of these supplied Milksolids.  The full implications of that will be profound, although not all are identified within Fonterra’s proposal booklet.

Sheep and beef farms are getting squeezed

The sheep and beef industry is getting squeezed from all sides, yet export returns exceed $7 billion.

I decided recently that it was time to take a closer look at what is happening on sheep and beef farms. The underlying motive is that I have been giving thought as to what the sheep and beef industry, which contributes around $7 billion of export income each year, might look like in another ten or twenty years. But before getting too immersed in that future, I needed to make sure I understood the present and how we got to where we are now.

A2 moves from a brand to a category

Many more A2 milk and A2 infant formula brands are now emerging across the globe but market leader The a2 milk Company is struggling

A notable change has been occurring recently with A2 milk products now available from multiple manufacturers. That includes at least three brands of A2 infant formula available here in New Zealand. These offerings are the original a2 Platinum from The a2 Milk Company (ATM), plus relative newcomers Karicare A2 from Danone and Haven A2 linked to Zuru.

There are also now at least three A2 fresh-milk brands in New Zealand, these being Fonterra, Fresha Valley, and a strangely named “organic A3” product which, according to its owners, is also produced exclusively from A2 cows.

Internationally, there are multiple A2 brands of both A2 milk and A2 infant formula now available, particularly in Asia, to a lesser extent in the Americas, but with Europe still lagging.

Most of the big international brands now have A2 projects. Including niche marketers, there are probably more than 20 brands spread across the globe.

Pastoral Lands Bill hits rocky ground

The Crown Pastoral Land Reform (CPLR) Bill has struck rocky ground as it now works its way through the Environment Select Committee stage. The Bill is opposed vigorously by most and perhaps all of the remaining 171 pastoral leaseholders in high-country New Zealand. These are the people who did not reach any settlement with the Crown during Tenure Review over the last two decades.

The importance of this CPLR Bill extends well beyond the pastoral leaseholders themselves. It is also relevant to any New Zealander who has an interest in land law and the ownership of land.  It is also important to anyone who has an interest in high-country conservation.

The NZ system for GHG reporting will be crucial

Big decisions still lie ahead as to how New Zealand reports its GHGs to the United Nations. Keeping short and long-life gases separate in the reporting headlines is vital.

A key forthcoming decision for New Zealand is how it will report to the United Nations on its Paris Agreement milestones.  On the surface, this many seem something for the bureaucracy to deal with, but the reality is very different. The issue is of fundamental importance.

The big question is whether New Zealand highlights the so-called total carbon dioxide equivalent number (CO2e) or whether it highlights the separate targets and achievements for short and long-lived gases. Once determined, the reporting metrics are locked in.

This question has been raised by the Climate Change Commission (CCC) in its draft report. Unfortunately, the issue has subsequently been largely ignored by the media, by commentators and also by rural industry groups, all of which have failed to recognise its importance in shaping the issues.

Forestry issues still need much debate

Land-use decisions between farm and forest need unbiased information from within New Zealand, without Government screwing the scrum towards foreign investors

In my last article on forestry, a little over two months ago, I ended by saying that “there is a need for an informed and wide-ranging debate as we search for the path that will lead to the right trees in the right place, planted and owned by the right people”. Here I take up that issue again.

In the interim, the Climate Change Commission (CCC) has published its draft report on how New Zealand might meet its Paris obligations through to 2050. A key message in the report is that forestry must not be used as the ‘get out of jail card’ (my term) that avoids facing hard decisions elsewhere in the economy.

Zespri faces a China conundrum

China is New Zealand’s biggest kiwifruit market. Growth of this market has been spectacular with the Zespri-owned SunGold variety much-loved by Chinese consumers. The problem is that the Chinese are also growing at least 4000 hectares of SunGold without the permission of Zespri. 

That compares to about 7000 hectares of SunGold grown in New Zealand.

The question now facing Zespri and the New Zealand kiwifruit industry is what to do about it.  There are no easy solutions.

New Zealand’s internal inflation is not benign

New Zealand’s internal inflation from non-tradables is well alight at 2.8 percent for the last year. In contrast, prices for items traded internationally declined by 0.3%.  Understanding these differences and the reasons for these differences lies at the heart of the inflation issue. Non-tradables comprise 60 percent of the CPI with tradables comprising only 40 percent.

In recent times, the much-repeated mantra from the Reserve Bank has been that inflation is too low. Much of the mainstream media has then spread that message without critical analysis.