China Farms and Australia are Fonterra ‘work-ons’

Fonterra’s recently announced profit figure for 2015/16 of $834 million is a big step forward from the $506 million of 2014/15. The biggest underlying source of improvement appears to have been the margin for commodity cheese over and above the auction price for whole milk powder (WMP).  This is because WMP dominates the milk price calculations whereas cheese margins go straight to profit.  A second major improvement has been Australian operations where unprofitable operations have been sold and the EBIT (earnings before interest and tax) are now running positive.

Changing agri-food perspectives

When I was an undergraduate back in the 1960s – in some ways it seems just yesterday – the dominant agricultural paradigms were about farm production and management.  As students, we learned nothing about marketing. And when marketing did come in vogue in the following decades, the dominant perspective was that marketing was what happened at the end rather than the beginning of the agri-food chain.

To a considerable extent, that perspective of a value chain that starts with production still survives within our animal-based agricultural industries. In contrast, the plant-based industries have been more successful in making the transition to a consumer-led position. And that may well be why, in an evolving world, our horticultural industries are currently succeeding where our traditional pastoral industries are currently struggling.

Lessons from Australian dairy

Our Australian dairy cousins are currently going through difficult times, particularly for those who supply Murray Goulburn, and to a lesser extent Fonterra.  There are lessons to be learned, although there may be alternative perspectives as to the specifics thereof.

Right now, production in Australia has plummeted. It will take a month or two to see how it all settles out, but early season production is down 10 percent.  Fonterra’s production is down 22 percent, and Murray Goulburn is in all likelihood down even more. Indeed, there have to be doubts as to whether Murray Goulburn can survive long-term in its current form.

Milk powder prices still look vulnerable despite mini-boom

Since late July, there have been remarkable price rises at the Global Dairy Trade (GDT) auctions for whole milk powder (WMP) and to a lesser extent skim milk powder (SMP).  Including the September 6 auction, WMP has risen 34 percent since late July, and SMP has risen 15 percent.

There has been no earth-shattering change in market fundamentals that would cause this mini-boom. So either the buyers were misinformed back in July when they were reluctant to buy, or they are misinformed now. Or perhaps this is just the way of global commodity markets in a crazy volatile world.

Value-add products need a point of difference

[This article was commissioned by the NZ Herald. It was written on 8 August 2016 and published on 31 August 2016. Since being written, some 24 days ago, we have seen substantial increases in dairy commodity prices, and in the short term (i.e. the forthcoming GDT dairy auction on 6 September GMT, and possibly subsequent auctions) these increases are likely to continue. However, the fundamentals remain unaltered; i.e commodities are highly volatile and will remain so, but there are also many traps for the unwary along the value-add path.]

There is increasing recognition within New Zealand that the dairy industry is in some trouble. Heading into a third year of low prices, questions have to be asked whether the industry is on a false path. And if so, where is the path back to firm ground?

Some will argue that the answers are simple: that we should reduce the dairy footprint on our land, and that we should focus on value-add. In reality, it is not that simple.

The pros and cons of PKE

In recent weeks, PKE has been in the spotlight.  The key reason for this has been the decision by Landcorp to phase out its use on the Landcorp farms. This has brought back into focus Fonterra’s 2015 recommendation to farmers to only use 3kg per cow per day. It has also given a platform for various other groups to promote their own perspectives.

Amongst the environmental groups, there are two polar perspectives. Greenpeace says we should stop using all PKE. However, the World Wildlife Fund (WWF) says that palm oil production is OK as long as it sustainable, and certified by the Roundtable on Sustainable Palm Oil (RSPO).

The snow has come again

Every year we all talk about the weather and how fickle it is.  This year is no different. In most parts of the country, June and July were unseasonably warm.  Where I am in Canterbury, winter grass growth has possibly been higher than ever before.  Grass covers at the start of August were excellent.

In contrast, last year was one of the coldest winters on record, with many South Island farms getting no net growth in June and July.   That year, there was a string of southerlies, whereas this year warm winds were blowing over the Alps.

Now in August we are getting our comeuppance. Brutally cold southerlies have been coming in from the coast, with heavy snowfalls against the foothills, and in some places extending out to the coast. The same systems, or modifications thereof, have then been slamming into Hawkes Bay and the Central North Island.