The world’s biggest dairy exporter said it now expects to earn between 45 and 60 New Zealand cents per share in the financial year ending July 2023, compared with an earlier estimate of 30 to 45 cents.

[Comment] Synthetic milk not like the udders

A sustained period of favourable pricing for its protein and cheese portfolios, as well as whole milk powder, is the main driver behind the earnings guidance boost, said Fonterra Chief Executive Officer Miles Hurrell.

“If these unprecedented conditions were to continue for a further extended period, this could have an additional positive impact on forecast earnings,” he added.

Fonterra on Sept. 22 is expected to report fiscal 2022 earnings at the top end of its guidance range of 25 to 35 cents per share, compared with 34 cents in 2021.

The Auckland-based firm lowered its milk collections forecast for the 2022-23 season to 1,495 million kilograms of milk solids from 1,510 million, as adverse weather conditions in parts of the country affected collection and resulted in a slow start to the season.

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The bust, which initially took place in March, uncovered the gang who had cut 276 tons of expired dairy goods into small packages to resell at cut-price rates for use in the baking industry, the Shanghai Municipal Food and Drug Administration said.

China is trying to improve a poor record on food safety, which has seen scandals from decades-old “zombie” meat to recycled “gutter oil” for cooking. The dairy sector is particularly sensitive after milk tainted with the industrial chemical melamine led to at least six infant deaths in 2008.

A spokesman for Fonterra said the company supported the action taken by Chinese authorities and that it believed the case was a one-off.

“We support the enforcement steps taken by Chinese officials. While we believe this is an isolated criminal incident, we are reviewing the case internally,” spokesman Phil Johnstone said in comments emailed to Reuters.

“Food safety is our top priority and we are committed to providing safe and high quality dairy products.”

Fonterra is one of the biggest suppliers of dairy to the Chinese market, but issues of over-supply and high inventory levels have pushed down prices and led some producers in China to dump stock.

New Zealand accounted for 40 per cent of China’s imports dairy products during the first seven months of this year, official China customs data show. China imported 550,000 tons of dairy products in that period, an increase of over 27 per cent year-on-year.

— Reporting for Reuters by Jackie Cai in Shanghai and Charlotte Greenfield in Wellington; writing by Adam Jourdan.

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The investigation comes after Australia’s largest dairy processor Murray Goulburn and New Zealand’s Fonterra Co-operative Group in April reduced their farm gate prices, or what they pay farmers for their milk, by nearly 20 per cent. This new price is below the break-even costs for a number of farmers, leaving many of them financially struggling.

The Australia Competition and Consumer Commission (ACCC) launched an investigation into the timing and notice of the cuts, but Joyce said the ACCC will launch a broader investigation.

“An in-depth and independent inquiry is a thorough and fair way to uncover inefficiencies and inequities that our farmers face — and identify a way forward,” said Joyce, who is also acts as the country’s agriculture minister.

“The ACCC inquiry, to begin in November, will investigate sharing of risk along the supply chain, supply agreements and contracts, competition, bargaining and trading practices in the industry and the effect of world and retail prices on profitability.”

The ACCC is expected to report its findings in the second half of 2017, and in the meantime global milk prices are expected to have rebounded.

Whole milk powder prices last week soared 18.9 per cent and are now 42 per cent higher than lows hit in February.

Murray Goulburn, rival Bega Cheese Ltd. and New Zealand niche processor a2 Milk Co. all met market expectations on Wednesday despite a turbulent year marked by falling prices and sluggish demand.

— Colin Packham is a commodities correspondent for Reuters in Sydney, Australia.

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The state-owned company, which runs 140 farms, said it would end the use of the feed by June 2017 to meet shifting consumer expectations on how food was produced.

Environmentalists say the product — what’s left of the palm kernel once the oil has been extracted — contributes to the profitability of the palm industry, which is under attack over deforestation, choking fires and habitat destruction in Southeast Asia.

“Landcorp wants our partners and customers to know they can trust that we farm sustainably and care for the environment,” said Landcorp chief executive Steven Carden in a statement.

New Zealand, which prides itself on its green image, has become a top buyer of PKE, a dry, gritty meal, to help it ramp up dairy production.

New Zealand buys around a quarter of global PKE, according to environmental lobby group Greenpeace, which has campaigned vehemently against the use of the feed.

“It’s not a good look for Kiwi farms to be linked to the destruction of the world’s last remaining rainforests,” Greenpeace forests campaigner Grant Rosoman said in a written statement.

Rosoman welcomed Landcorp’s move and called on New Zealand dairy giant Fonterra to follow suit. Fonterra did not immediately respond to requests for comment.

Last year Fonterra called on its 10,500 farmer shareholders to limit the use of palm kernel to three kg per animal per day. The company said its PKE supplier Wilmar already had a no-deforestation policy, but that it wanted its protect the premium commanded by dairy products from purely grass-fed animals.

— Reporting for Reuters by Charlotte Greenfield.

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Fonterra’s GlobalDairyTrade Price Index dipped 2.9 per cent, with an average selling price of $2,190 per tonne, in the auction held on Tuesday (all figures US$).

A total of 20,406 tonnes was sold at the latest auction, falling 6.7 per cent from the previous one.

Dairy futures had suggested prices might rise, but analysts said continued strong global dairy supply was putting pressure on prices.

“The NZX Dairy Futures market has previously been a good barometer of market sentiment, but despite futures prices softening in the past few days this market was factoring in a lift in GDT prices,” said AgriHQ analyst Susan Kilsby in a research note.

Measures designed to support dairy farmers announced by the European Commission this week would continue to drag on prices, she added.

“The support mechanisms will distort market signals and therefore European farmers are likely to continue to produce more milk than the market requires,” Kilsby said.

After rising steadily since 2008 to scale record highs in 2013, global dairy prices have dropped sharply because of slowing economic growth in China and global oversupply of milk products.

The weak prices have put significant pressure on New Zealand farmers, with an estimated 80 per cent currently operating below break-even. The country’s central bank is today due to announce the results of a stress-test it asked major banks to undertake on their dairy portfolios.

The GDT auctions are held twice a month, with the next one scheduled for March 29. The auction platform was set up by Fonterra and is operated by trading manager CRA International.

Participants include Fonterra, Amul, Arla Foods, Arla Foods Ingredients, DairyAmerica, Euroserum and Murray Goulburn.

The auction results can affect the New Zealand dollar as the dairy sector generates more than seven per cent of the nation’s gross domestic product. The currency was quoted at 65.95 cents, having fallen overnight from as high as 66.84 cents the previous day.

— Reporting for Reuters by Charlotte Greenfield and Bangalore commodities desk.

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Fonterra’s GDT Price Index dipped 1.6 per cent, with an average selling price of $2,458 per tonne, in the auction held Tuesday (all figures US$). Whole milk powder prices fell 4.4 per cent to $2,210. The NZX Dairy Futures market had anticipated a lift in prices.

“The weak GDT results are disappointing given the significant gains anticipated by the market. However, global demand for dairy commodities continues to be weak relative to global milk supply,” AgriHQ analyst Nick Handley said.

A total of 25,671 tonnes was sold at the latest auction, an increase of 3.1 per cent from the previous sale, according to GlobalDairyTrade.

The auctions are held twice a month, with the next one scheduled for Jan. 19.

After rising steadily since 2008 to scale record highs in 2013, global dairy prices have dropped sharply because of slowing economic growth in China and global oversupply of milk products. China is one of New Zealand’s top export markets and the world’s largest importer of whole milk powder.

The weak dairy prices have put significant pressure on New Zealand farmers. The central bank now estimates around 80 per cent of dairy farmers will have negative cash flow in the current season, posing a risk to the economy.

Economists said the latest auction result adds to the risk that Fonterra will have to lower its milk payout forecast for the current season even further.

Westpac Bank senior economist Anne Boniface said the current El Nino weather pattern could curb New Zealand’s production, which might lift prices.

However, “with European milk production still growing strongly, and the Chinese economy continuing to look relatively soft, a more sustained improvement in prices looks likely to be a while away yet,” she said.

The auction results weighed on the New Zealand dollar , already under pressure due to anxiety about sluggish global growth, further losses in the Chinese stock market and the breakdown in relations between Iran and Saudi Arabia. The kiwi traded as low as US66.77 cents after the result.

— Reporting for Reuters by Rebecca Howard.

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Dairy prices have more than halved from record highs scaled in 2013, with Chinese buying dropping off dramatically after the world’s second-biggest economy built up excess supplies of milk powder last year just as the economy began to slow.

Fonterra, the world’s largest dairy exporter, has dominated the commodity milk powder sector for years and had been rapidly expanding its business in China.

But profits have been falling for nearly two years in the face of volatile dairy prices, which sank to a 12 1/2-year low at the latest global auction on Wednesday.

As a result, Fonterra said on Thursday it would cut more than 500 of its 16,000-strong global workforce, and warned more redundancies were likely as it reviews its operations.

New Zealand’s dairy exports to China have tumbled 69 per cent since the start of the year compared with 2014, official data shows, whittling Beijing’s share of the country’s total dairy shipments to roughly 16 per cent, from 37 per cent last year.

At the same time, a ban by Russia on foreign dairy products, imposed in response to sanctions slapped on the country over its role in the Ukraine conflict, has removed a major buyer of butter and other milk products.

Meanwhile, supply has ramped up as farmers in New Zealand, Europe and the U.S. have set up dairy farms in hopes of cashing in on a doubling in dairy prices between 2009 and 2013. Production in New Zealand, the world’s biggest dairy exporter, has reached record highs.

“It’s really both sides of the equation. We had a period of really high milk prices, and that encouraged additional milk production across the globe,” said Susan Kilsby, dairy analyst at agricultural consultants AgriHQ.

“There’s been… no reason to slow production anywhere as feed costs are low so there’s still a lot of signals to encourage milk production. That’s timed with the two largest buyers of dairy products buying less than usual.”

More room to fall

Industry sources say Chinese processors are still working through stockpiles of imported milk powder, prized over domestic offerings due to past safety scares, which is used in everything from confectionary to baby formula.

That has kept Chinese buyers out of the market since the start of the year.

“The optimistic view is that there is 150,000 tonnes of powder sitting in warehouses,” said David Mahon, managing director of Beijing-based Mahon China Investment Management, which focuses on China’s food and beverage sectors. “I think it’s well over 300,000 tonnes, but the mix is hard to know.”

Such a stash would equal roughly half the volume of milk powder New Zealand exported to China in the whole of 2014.

Analysts see the risk of prices falling further, with demand unlikely to pick up soon as Chinese processors work through their existing stocks.

Adding to the expected glut, New Zealand’s farmers are gearing up for the milking season beginning next month after the Southern Hemisphere winter.

“Often at this time of the year you see a faster increase in supply out of the Southern Hemisphere because supplies are tight, but we’re certainly not seeing that this year,” said Kilsby at AgriHQ. “There are certainly opportunities for prices to fall further.”

— Naomi Tajitsu is a Reuters correspondent based in Wellington, New Zealand. Additional reporting for Reuters by Adam Jourdan in Shanghai and Dominique Patton in Beijing.

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Fonterra said the subdued outlook amid sluggish demand would likely slow the pace of New Zealand dairy output growth, and kept its forecast payout price to farmers for 2015-16 below the long-term trend despite a rise from this year’s eight-year low.

Persistently low dairy prices have clouded the growth outlook in the agriculture-based economy where dairy products make up more than a quarter of total exports, and raise the possibility of an interest rate cut in coming months.

Fonterra increased its initial forecast for its farmgate payout price to NZ$5.25 (C$4.68) per kilogram of milk solids from NZ$4.40 this year, reflecting a recent slight lift in global prices which have tumbled around 50 per cent since 2014.

The forecast payout is still below a long-term average around $6.50, raising the risk that farmers may rein in the strong growth seen in the country’s “white gold” industry in the past decade and take on more debt.

“At these payout prices, I’m not expecting massive production growth next season,” Fonterra CEO Theo Spierings told Reuters.

“It could turn out to be a season of one per cent or two per cent growth,” he said, lower than average annual growth of around three per cent in past years.

Fonterra, which controls about a third of global dairy exports, expected only a limited pickup in global prices as demand from conflict-stricken countries in the Middle East and Africa continues to fall, despite some gains in top buyer China and Southeast Asia.

Spierings said prices for whole milk powder, New Zealand’s biggest export product, would likely average around $2,900 per tonne in the next 12 months, up from near-historic lows around $2,400 at present but well below highs of $5,200 in late 2013.

He was “cautious” about any pick-up in demand next year, and said an environment of lower global dairy prices would likely curb the company’s expansion plans and slow offshore investments, including in its dairy farms in China.

Low dairy prices also increase the risk that New Zealand’s farmers, already strapped for cash due to this year’s low payout, may take on more debt. The dairy sector accounts for around 10 percent of total borrowing in the country.

“Cashflows will continue to be very tight… it’s going to be tight for the majority of farmers over the next little while,” ASB Bank rural economist Nathan Penny said.

— Naomi Tajitsu is a Reuters correspondent based in Wellington, New Zealand.

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Details of the Comprehensive Economic and Trade Agreement (CETA) are still being hammered out and it’s expected to be two years before the deal is ratified by the European Union’s 28 member nations. But once in effect, European cheese makers would receive an additional tariff-free access of 18,500 tonnes over and above the current 13,471 tonnes they’re allowed.

Translate that back into milk production and the impact on Canadian dairy producers is “much more significant than what has been reported,” Dairy Farmers president Wally Smith told the Commons agriculture committee.

“The loss to the dairy farmers is real,” Smith said. “The additional access is equivalent to a 2.25 per cent cut in farm quota, representing a farm income loss of nearly $150 million a year.”

That’s equivalent to the entire milk production of Nova Scotia, he noted.

Ottawa has promised to compensate those affected and the Dairy Farmers of Canada has begun discussions on that issue, said Smith.

“DFC is trying to work with the government to ensure that there is no impact on Canadian dairy farmers and cheese makers,” he said. “In spite of all the negative emotion amongst Canadian farmers resulting from the CETA agreement, the DFC leadership is intent on engaging in constructive dialogue with government to mitigate the negative impact to our industry.”

It was initially estimated that while the deal would allow Europe to capture one-third of the “fine cheese” market in Canada, it would amount to just four per cent of the overall cheese market. But Smith said that if the entire tariff-free quota is used, the EU will capture 7.5 per cent of the Canadian cheese market.

And it will be riding on the coattails of the marketing efforts of Canadian dairy farmers, he added.

“The domestic cheese market has been a priority market segment with a yearly strategic investment totalling $30 million dedicated to developing this market across Canada,” Smith said.

“Over the last decade we have invested heavily into developing and growing the specialty cheese market, and we have been successful. What has happened, by giving that access to the European Union, not only are you costing the farmers directly on their income, and having to reduce production, you are also taking away the investment that’s been made to grow that speciality market.”

It will also have a wider economic impact as the Canadian dairy sector accounts for 218,000 jobs, and pays more than $3 billion in local, provincial and federal taxes annually, according to DFC.

The organization also dismissed any idea that more Canadian cheese might head across the Atlantic. Canada has been unable to fill the existing duty-free quota of 4,000 tonnes of aged cheddar and to match the highly subsidized European milk prices Canadian farmers would have to sell their milk to processors at $28 a hectolitre, said Richard Doyle, the group’s executive director.

“Quite frankly, not a single producer in this country, based on our cost of production, could actually recover their cash costs,” he said. “No return on investment and no return on labour.”

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Or so you’d think by reading national newspapers these days.

Ever since Canadian participation in the TPP talks was announced last month, columnists in the Globe and Mail and National Post have been delivering a relentless attack on supply management, and last week were wriggling like puppies following an op ed by Liberal leadership hopeful Martha Hall Findlay. She wrote:

“Dairy farms are governed by a byzantine system that prices milk based on intended usage, locks out most foreign products with exorbitantly high tariffs and even determines how much farmers can produce. Everyone suffers. First in the line of people harmed by supply management are consumers — Canadians are forced to pay two to three times as much for whole milk as Americans.

“It is simply untenable that Canadian families pay upwards of $300 more a year than they need to, for milk alone, let alone higher prices for other products like cheese, yogurt and ice cream, to subsidize a tiny number of relatively well-off farmers. Worse, it’s regressive, which means that the ones who suffer most are the low-income families — the very ones who most need affordable access to nutrition.”

Ms. Hall Findlay continues:

“In contrast to the fewer than 15,000 supply-managed farmers, there are more than 10 times that many — over 210,000 farmers (92 per cent of the total number of Canadian farmers) — that are directly dependent on export markets; they either export their products or sell them domestically at prices set by international marketplaces.”

So, not only are wealthy supply-managed farmers depriving poor children of food, they’re depriving their fellow farmers of a decent income. Case closed, or so it would seem.

There are a couple of reasons for this relentless assault. One is that high milk prices are easy column fodder on a slow news day. The other is that the TPP is important and the columnists need to write about it, but don’t know what’s in it.

In fact, hardly anyone knows what’s in it. The TPP is a U.S. initiative, but the U.S. Trade Representative’s (USTR) office has signed a confidentiality agreement with participating countries and the details are not being shared with anyone else, including the U.S. Congress.

Last week 130 members of the House of Representatives sent a letter to the USTR asking for more transparency. That followed a similar letter from a group of U.S. senators:

“Indeed, the negotiations USTR is pursuing will create binding policies on future Congresses in numerous areas where there is significant public interest, including policies related to labour, environment and natural resources, land use, food, agriculture and product standards, intellectual property rights, state-owned enterprises and government procurement policies, as well as financial, health care, energy, telecommunications and other service-sector regulations.”

You mean to say that these items are also in the TPP? You wouldn’t know it from reading the national media.

Sure, some competitors have a wish list, but that doesn’t mean each item is a deal breaker. Fonterra, New Zealand’s dairy quasi-monopoly, and some U.S. dairy processors say they want access to the Canadian market. Well, yeah. Fonterra wants access to the U.S. market too. If you think that’s going to happen, then you’re…, well, a columnist for a newspaper in Toronto who hasn’t figured out the dilemma: the U.S. isn’t going to drop its dairy program, or its indirect support of the poultry industry. If Canada drops border controls, then it either matches the U.S. programs, or loses the industries. That’s the key point that SM producers need to emphasize.

TPP or not, they have a big public-relations problem. Traditional arguments won’t get them out of it. Trying to claim that milk and poultry in the U.S. aren’t cheaper won’t work, nor will talking about how Canadian product is safe. “It won’t make you sick,” is not a good marketing pitch.

When SM was introduced, farmers in effect made a deal with consumers — “Give us a fair price and we’ll stay out of your pocket as a taxpayer, and not ask for U.S.-style subsidies to dump our overproduction.”

Most consumers today are probably willing to make a new deal to ensure their milk doesn’t come from Wisconsin, Minnesota and California, and their chickens and eggs from Georgia. Often, neither the farmers, the workers or the animals are well treated in the U.S. system. Canadian farmers need to explain that, and demonstrate that their system is better, not just for them, but for the cattle and birds in the barn. Otherwise they’re going to lose support for supply management, with or without the TPP.

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