Insight
FEBRUARY 2015 //
FROM THE GROUP CEO
Mixed prospects for new year Fonterra’s $4.70/kg milk solids payout revision in mid-December could be likened to the smoke we can smell from a fire whose heat we can’t quite feel yet. Up until October last year dairy farmers were enjoying some significant retrospective payments that buffered the constant flow of bad news from the country’s largest dairy processor. But heading into autumn now and the last third of the season, these payments are well gone with income sourced only from the meagre $3.85/kg milk solids advance payment. To put some firmer numbers around what it means at the farm gate, an average sized Canterbury dairy unit with 800 cows will take a hit of $1.0 million off last year’s income. Expanded across the entire Canterbury region, and allowing for similar declines in Fonterra’ competitor’s payout, there will be $1.0 billion less to spend across the region this year.
with dairying, and given the volatility of global markets, will be there again. Back in 2008-09 the payout slumped from $7.59/kg MS to $4.75, bouncing back up to $6.10/kgMS in 2009-10. Memories are short, but we saw few farms go broke then, and given the level of debt repayment last season, probably even fewer this time. Canterbury’s adaptive farming environment also means this region enjoys greater variety than most areas in terms of income source. This means the hit from dairy will not be as all-encompassing as it will be for regions like Taranaki and Waikato. Dairy’s dark clouds are not banished, but are at least pushed a bit further onto the horizon with good news coming out of the sheep and beef sector. Global supply dynamics mean the world demand for beef is proving increasingly hard to meet as Asian markets get a taste for westernised food as their incomes and number of urban dwellers rise. China alone has experienced phenomenal growth in both sheep meat and beef demand in the last two years, both which NZ has benefitted from.
Uncertainty over what the 2015–16 season brings will see farmers sit tighter for longer on farm expenditure until well into the 2016 calendar year, and even then only if prospects on global markets have lifted.
By the middle of last year total sheepmeat sales to China totalled 160,000t for the year, a massive six fold increase in only five years. Similarly while it is a smaller volume, beef has also experienced a surge to both the Chinese and more traditional United States market.
The upside to look for in this rather gloomy prospect is that we have been here before
Late last year Meat Industry Association Chief Executive Tim Ritchie said demand
for quality meat in China was such NZ would struggle to keep up. China is now NZ’s largest sheepmeat market, and second largest beef market. Indications are this growth will remain, and lamb prices held firmer for longer well into the usual pre-Christmas slide period, and the $100-plus return will do much to deliver a $100,000-plus profit again to sheep and beef operators this farming year. Overall Beef + Lamb NZ is optimistic about the effect this will have on farmer’s incomes, with sheep and beef incomes expected to average $129,600, up from $116,000 last season. Grain farmer prospects will be swinging to some extent on dairy fortunes, with farmers holding back on additional grain supplement where possible. Crop areas are expected to be the same as last year, but big demand reductions are anticipated, with slides of $20-$30/t for barley and wheat and contract prices sitting $30-$35/t lower for both. Lower price parity for imports of grain from Australia to the North Island mean a surplus of available grain is quite likely. However as in 2012, growers may again be happy to sit on their grain supplies to keep prices firmly over $400/t, rather than see the bottom fall out of the market in the current season.
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