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All over New Zealand sheep farmers are naturally rejoicing at the great prices that they are getting for their lambs – and so they should be.

For many years sheep farmers have had to live with poor prices and this has been reflected in the investment going back into hill country farms. Now the tide has turned, seemingly for the better.

This year for instance, the topdressing industry is climbing on the back of the good lamb prices and the orders for fertiliser are coming in thick and fast. Watch out as those field days people have deals that are too good to be true – just waiting for farmers.

But is this all good news? The answer is yes and no – probably!

While farmers and their leaders argue these kinds of returns are necessary to keep them in business, others in the city are not so happy.

The local butcher is now paying about $200 for a lamb from the works and he has to add onto that a margin to make a profit. A leg of lamb that would feed an average family costs close to $70 and for all, but the rich and famous, that’s unaffordable.

The vast majority of consumers are turning away from lamb because it is too expensive – not because they don’t like it. The worry is that in the long term they will lose the taste for something that New Zealand is famous for.

BLNZ Chairman, Mike Petersen is right when he says lamb is becoming like bluff oysters – a luxury food for the wealthy.

Beef + Lambs chief executive Rod Slater – who’s in charge of the promotion of meat locally – says price is one of the main factors that is driving lamb off the menu of a lot of people.

BLNZ recently commissioned research into the eating habits of New Zealanders, which show that people are becoming much more price sensitive.

“When you think about it, leg of lamb that was probably $25 not so long ago – now it’s close to $50. As a result, people are turning to beef, pork and chicken,” he says.

Slater says that not so long ago, lamb was regarded as an every day food, but now it’s perceived as a special occasion food for events such as Christmas day or mother’s day.

He acknowledges that the cost of lamb means that some people will never eat it and, to some extent, is an example of the social divide in New Zealand. Slater says lamb is seen as more luxurious than fish the challenge is now to find ways of making some lamb cuts more affordable. However what’s evident from the research is that the days of the Sunday roast are long gone.

“The research shows that the most popular days for eating lamb are Tuesdays and Wednesdays – goodness knows why – I have no idea. Friday was the least popular day which has traditionally been a day when less meat is eaten, but the weekend roast just doesn’t happen anymore. People are more likely to have barbequed chops on the weekend. The most popular cuts are shoulder chops and loin chops,” he says.

The other problem for lamb is that there is a generation of people who don’t know how to cook it.  So while it’s good to enjoy high lamb now, perhaps greater thought and effort needs to be given by the meat industry to ensure that lamb remains an iconic food for all New Zealanders, not just the wealthy.

It was somewhat unfortunate that in the very same week Fonterra marked its first decade of mainly successful existence in New Zealand; next season’s forecast milk price was slashed by 45 cents a kilogram of milksoilds and its farmers in the upper of half of the North Island were forced dump millions of litres of milk that were unable to be processed due to the Maui gas pipe leak.

But this is probably a fair reflection of how Fonterra has performed during the past decade. On the whole, the dairy co-operative has performed pretty well, with numerous ups and down – many of which have been beyond its control. Despite these recent hiccups, there is no doubt about the major impact the co-operative has played in the New Zealand economy during the past 10 years.

Fonterra was set up in 2001 and represents about 96% of all dairy farmers in the country who collectively own 4.4 million cows. It is the world’s leading exporter of dairy products and New Zealand’s largest company with $14.1b in assets. The company collects more than 15 billion litres of milk a year from New Zealand farms and sells more than 2.3 million metric tonnes of product to export markets around the world. The dairy giant has paid around $65 billion to farmers and shareholders since its inception a decade ago.

According to a report released by the New Zealand Institute of Economic Research (NZIER) in December last year, the dairy sector accounts for 2.8% of the nation’s gross domestic product – or $5b. This contribution is greater than the GDP contribution of the combined fishing, forestry and mining sectors  and around 10 times as large as the GDP of the wine sector. The dairy sector is also a major employer, providing jobs for around 35,000 workers in farms and processing plants.

The dairy volume expansion over the past decade has, according to the NZIER report, been worth an additional $650 of income per person in the Southland region and $590 per person in the Canterbury region.  Northland ($110 per person) and the Waikato ($270) have also been major winners. Nationally the growth in dairy has resulted in New Zealand households being a cumulative $6.4b better off than if the
ector’s activity had stayed at 1999 levels.

And this growth shows no sign of stopping. Fonterra announced another record financial performance and record milk production for the current year, which will see it distribute milk payments and dividends this year totalling $10.6b – $2.4b more than in 2010 and $1.5b more than its previous best year in 2009.

Fonterra chairman Sir Henry van der Heyden said the benefits of a higher Fonterra payout extended well beyond farmgate, because farmers spent around 50 cents out of every dollar on locally produced goods and services.Van der Heyden believed it was fitting that the record result was achieved as Fonterra marked its 10th anniversary.

“Ten years ago, the New Zealand dairy industry came together to form a national champion in Fonterra. Our collective vision was to create a business with the scale to become a world leader in dairy ingredients and maximise dairying’s contribution to the New Zealand economy.

And that’s exactly what Fonterra has done, but now for that second decade…

Turners & Growers has given up on its challenge to the export monopoly of kiwifruit marketer Zespri. Turners claim the backdown is due to the kiwifruit disease crisis currently hitting the industry. Managing director Jeff Wesley says his company was going to appeal against last year’s High Court ruling which upheld the regulations giving Zespri its kiwifruit export monopoly. However, he says the challenge has been abandoned because the Psa disease crisis was putting kiwifruit growers and their families under severe pressure. “Psa will change the industry in a way that no-one could have imagined. Like all kiwifruit growers, Turners & Growers is hoping that a solution will be found quickly and that needs to be the focus for everyone in the industry at this time.” The independent fruit export company launched a string of publicity and legal actions in 2009 aimed at overturning Zespri’s monopoly right to export New Zealand kiwifruit to all countries except Australia. The industry has operated a single-desk system in export markets since 1987 when the Kiwifruit Marketing Board became responsible for marketing New Zealand’s crop. The majority of growers voted then to exclude numerous exporting firms because of a perception they were undercutting each other in overseas markets and consequently reducing orchard returns. Zespri International won its single desk exporting status in 1999 when the kiwifruit industry was restructured. Under legislation sought by growers only Zespri or those exporters with a collaborative contract can legally sell kiwifruit in overseas markets other than Australia. The raid on Zespri’s export monopoly was led by Turners former chairman Tony Gibbs who had fronted the company’s similar challenge to Enza’s apple export monopoly a decade or so earlier. “I believe the time has come to challenge this outdated monopoly. Offshore retailers are crying out for alternatives and now that Turners & Growers has its own green, gold and red varieties we are in a position to become, once again, a major force in the kiwifruit industry.” Gibbs was at the helm of Guinness Peat Group (GPG) when it staged a corporate raid on the grower-controlled Enza company – which had succeeded the Apple and Pear Marketing Board –and gained control of Enza assets and the brand was taken over by its subsidiary Turners. This proved to be a long and bitter battle, but one the cantankerous Gibbs seemed to thrive on. However, T&Gs battle to challenge Zespri’s export monopoly seemed to run out of puff when Gibbs was dropped from GPG – after a long and grueling battle with his former ally Sir Ron Brierley – over the future direction of the corporate raider. It seems the loss of Gibbs from Turners – and his passionate dislike for industry body monopolies – has seen the company lose its desire, in the face of mounting criticism from growers, to break Zespri’s export monopoly. Turners challenge has been most unpopular with kiwifruit growers from the get-go and its decision to quit due to Psa seems like a convenient – and handy – excuse for the company to save face and backdown.

Recently there was more even proof that the farming sector is doing okay with news that the Government’s farming entity Landcorp is paying taxpayers a $27.5 million dividend this year.
This result is a big improvement on last year’s $10m pre-tax profit.
The state-owned enterprise reported a $42.2 million net operating profit before tax for the year ended June 30.
The corporate farmer says this profit improvement is due to higher meat, dairy and wool prices and favourable growing conditions through the second half of the year. The dividend is also a big increase on the previous year’s $18m.
The profit came from $94.6 million, made from a record production of 12.5m kilograms of milksolids and another $51.3m from sheepmeat. Its average lamb price rose 40 per cent– as the export lamb market made a strong recovery.
Meanwhile, beef earnings were up 28 per cent to $40.1m, along with wool, venison and forestry. The company also made an extra $10.3m on land sales.
Landcorp chairman and former agriculture minister Jim Sutton said it was gratifying that the state farmer could make such an increased cash contribution to New Zealand after the Christchurch earthquakes.
“Our commitment in 2011-12 and beyond is to keep delivering in financial terms and in response to other big economic and environmental challenges facing this nation,” he said.
But is Landcorp really delivering all that greater return to taxpayers and the Government?
The state-owned organisation currently owns 175,000ha of farmland, valued $1.05b and livestock worth some $297m. It has a total asset base of $1.66 billion.
Even with my rudimentary maths skills, I can see that a $42 m profit and a $27 m dividend is not all that of a wonderful return on capital base – in fact is pretty awful!
So is Landcorp really that good of an investment for the Government and taxpayers?
While I know it is almost now considered sacrilege to talk about state asset sales and even a more treasoness offence to consider selling farmland to foreigners – especially those of Chinese extraction.
But should we not at least discuss it? When the Government is running massive deficits and struggling to pay for essentials such as healthcare and educations – let alone the rebuild of Christchurch as Jim Sutton points out – can New Zealand afford to sit on a near $1.7 billion of assets with such a poor rate of return?

 

Fonterra recently waved goodbye to its Canadian-born chief executive Andrew Ferrier after eight years in the top job.

As is often the case when a popular and long-serving CE departs a company, Ferrier has been sent off in a blaze of hagiographic media articles about going out on top.

While there is some truth to this, the fact remains not everything Fonterra did under the likeable Canadian’s reign was a roaring success.

Ferrier’s eight-year tenure as chief executive of the country’s biggest company is like one of those Clint Eastwood western’s – a bit of a good, bad and ugly story!

Obviously the good includes Fonterra’s latest financial performance. For the year ended July 31 2010, the company posted revenue of $16.7 billion. This includes a record payout of $8.25, comprising a “Farmgate Milk Price” of $7.60 per kilogram of milk solids for the 2011 season and a “Distributable Profit” of 65 cents per share for 2011.

This is $1.55 ahead of the prior period’s $6.70 and exceeds the previous record of $7.90 in 2008. The cash payout of $7.90 is also a record and is $1.53 higher than the prior period’s $6.37. Meanwhile, the forecast payout to farmers, before retentions for the 2010-11season, is a record $8 to $8.10 per kilogram of milk solids.

Ferrier can also look back fondly on the smoother integration and more united attitude of the co-operative under his watch. When he came on board, there were still a few hangovers left over from the NZ Dairy v Kiwi legacy companies. This was further inflamed when inaugural CE – and former Kiwi boss – Craig Norgate was dumped in favour of the genial Canadian.

Ferrier, to his credit – along with chairman Henry van der Heyden – has instilled a one company culture which has seen these pre-merger rivalries all but disappear for both farmers and staff.

The bad would have to include Fonterra’s continued association with poor-on farm environmental behaviour and the co-ops reluctance to punish farmers who continually transgress.  The dairy giant has also been slow – and too often silent – to react to unfair criticism of it and/or farmers on any number of controversial issues including: the aforementioned environmental issues, ETS-related matters, use of palm kernel extract, milk prices and dairy farmers paying tax.

A much more front-footed approach by Fonterra – rather than its risk-averse default setting – is something Ferrier could and should have led.

Meanwhile, the ugly – and the ugliest event to happen under Ferrier’s watch – was back in 2008 when Chinese dairy company Sanlu, of which Fonterra owned 43%, caught up in a melamine contamination scandal in which at least six infants died.  Fonterra, and Ferrier, came under intense media scrutiny, Sanlu went bankrupt and the co-op wrote off its $201 million investment.

Another less than pretty moment was the 2006 proposed capital restructure, which was shot down by farmer anger with poor communication and explanation of the scheme by Fonterra. While Fonterra’s Board ultimately carried the can for this, it would have been Ferrier and his executive who came up with the concept.

Now the current TAF proposal is entering similar territory as more and more farmers start to baulk at the idea and Fonterra will have to move quickly to place them or lose this battle as well.

Overall, Andrew Ferrier can be enormously satisfied with his time in charge of Fonterra. However, a ‘warts and all’ view proves his time was not all beer and skittles as some in the media have portrayed it.

The Government has plumped for commonsense rather than economic suicide by deferring the agriculture sector’s entry into the controversial Emission Trading Scheme (ETS).
Farmers and climate change critics have consistently argued for a longer delay and/or for agriculture to be left out altogether – until the necessary technologies are available to reduce on-farm greenhouse gases.
A recent review of the ETS called for a slowdown of its implementation, but left unchanged controversial plans to introduce agriculture into the scheme from 2015. The review panel, chaired by former Finance Minister David Caygill, had recommended that the agricultural gases methane and nitrous oxide be brought into the scheme in 2015, as the current legislation requires.
In the panel’s model, farmers, rather than processors like the meat and dairy companies, would be accountable for those emissions, which make up nearly half the national total. They would get a free allocation of carbon credits covering 95 per cent of their emissions for the first two years, which would fall to 90 per cent over the following three years and by 1.3 per cent a year thereafter.
However, Climate Change Minister Nick Smith has sensibly ruled that agricultural emissions will only be included if “practical technologies are available to enable farmers to reduce their emissions and more progress is made by our trading partners to reduce their emissions”.
Federated Farmers is understandably delighted with the Government’s move. It has always argued that it’s crazy for New Zealand farmers to be hit with the costs of an ETS when they had no way of mitigating these and when other farmers around the world were not being penalised accordingly.
“Farmers are extremely pleased that Minister Smith has reaffirmed a pledge the Government has given to Federated Farmers, that biological emissions will not be included in the ETS if our trading partners do not follow suit,” its vice-president and climate change spokesman, William Rolleston, said.
Meanwhile, critics and environmental doomsayers like the Green Party’s Russel Norman are not so happy. He has even had used recent Reserve Bank forecasts that expect current export commodity prices to remain high as proof that farmers can afford to pay any costs imposed by agriculture’s introduction into an ETS.
“It means that greenhouse-intensive industries like dairy are in a strong position to pay their way. But this Government will continue to give them a handout.”
But Smith has dismissed Norman’s predicable whining by saying the Government’s primary objective with the ETS is to drive investment into more efficient production.
“We are not interested in simply including agriculture in the ETS to impose a cost when there are not practical technologies through which they can reduce emissions, in contrast to a sector like electricity where there are really good opportunities.”
Now there will be the invariable calls from Norman and his ilk of eco-Nazis that New Zealand farmers are getting a free ride, but again this is selective reporting. There is already evidence – which is also noted by Caygill’s Review Panel – that the agriculture sector is reducing its greenhouse gases. Emissions per unit of product from agriculture had fallen by about 1.3 per cent a year over the past 20 years – due to improved management practices, animal genetics, pasture and crop genetics and technological changes.
The Government’s view that it won’t support the introduction of agricultural emissions into the ETS is smart, sensible and economically prudent.

Just in case any New Zealanders don’t understand why the agriculture sector is so important to our country’s future they should take a quick look at the latest terms of trade figures.

The terms of trade refer to the value of the country’s exports relative to that of its imports.

These show that strong dairy prices and rocketing wool prices helped lift the country’s terms of trade to a 37-year high in the June quarter – up 2.3 per cent in the three month period.  

Export volumes were also at their highest levels since 1990 when the statistics. That means 2.3 per cent more imports could be paid for by a fixed amount of exports than in the March quarter.

The key gains in export prices were dairy up 4.5 per cent; meat up almost 3 per cent; wool up more than 12 per cent.

In fact, wool prices have risen more than 58 per cent in the past year to their best levels since 1989. The annual rise in wool prices is the biggest since the mid-1970s.

It was more than 20 years ago that former Prime Minister David Lange infamously boasted that agriculture was a sunset industry, but these latest figures show that farming is New Zealand’s sunrise.

The latest quarterly terms of trade data coincides with a season in which Fonterra is paying its farmer shareholders a record $8 to $8.10 before retentions for the milk and share of other earnings. Global commodity prices have been soaring on demand and reached a record high in May, based on the ANZ Commodity Price index, which has edged lower in the past two months.

“We have a positive medium-term outlook for the terms of trade and see it remaining high relative to history,” said Philip Borkin, economist at Goldman Sachs. Borkin says there are signs the rural sector is starting to spend and invest more rather than simply paying down debt, which should yield “positive growth multipliers” for the wider economy.

David Lange’s prediction about the demise of agriculture proved about as accurate as his desire to hold on to the top job. While the great orator went on to become a big, fat, quitter – agriculture has continued to prop up New Zealand’s economy.

Figure s show that in 1999, exports from the entire agricultural sector (excluding fisheries) generated $13.1 billion of export revenue or 60 per cent of all NZ’s exports. Fast forward to 2008, and exports from the entire agricultural sector (excluding fisheries) generated $23.4 billion in revenue or 61 per cent of all the country’s exports.

These figures – and the latest terms of trade – show that agriculture really does underpin the New Zealand economy.

It is not so much “Houston we have a problem”, but more like “Fonterra we have a problem”.

A year after endorsing its capital-raising scheme Trading among Farmers (TAF), some of Fonterra’s farmer shareholders are now balking at the concept. They are questioning whether they will keep 100% ownership and control of the co-op.

This dissent is being lead by a South Island shareholder group led by Ashburton farmer Eddie Glass.  He voted last year for TAF, but says there is a “hidden agenda” to allow investors a greater say in Fonterra’s governance.

Fonterra chairman Henry van der Heyden will not be happy to see the co-op’s second attempt at capital raising from outside sources bite the dust again.

Van der Heyden will well remember his board’s first attempt at capital raising, four years ago, which led to widespread shareholder dissent and an embarrassing back-down and scrapping of the proposal by Fonterra.

The fallout saw a number of farmer directors’ votes off the board and a much more careful attempt this time.

All was going to plan for Fonterra for TAF until the Government put the kibosh on legislation being fast-tracked and passed before this year’s election. This has given shareholders more time to consider the ramifications of the plan.

This has eventuated in Glass and his fellow southern dissenters fearing investors holding dividend-bearing non-voting units will end up appointing non-farmer directors, favouring higher dividends at the expense of milk price paid to suppliers.  

These shareholders believe such investor-friendly directors will lead to tensions between the dividend and milk price. They question how the Fonterra board serve two masters.

The southern dissenters have also taken a swipe at the Fonterra Shareholders Council, saying it isn’t “asking the hard questions” on their behalf. They believe the council is nothing other than Fonterra’s lapdog giving farmer shareholders merely a Clayton’s vote set up as a box-ticking exercise.

Shareholders Council chairman Simon Couper denies this and claims that “a good process” is in place to review TAF before final approval is given.

However, the problem for Couper and van der Heyden is that the growing perception is – as it always has been – that the Shareholders Council is not the watchdog for farmer shareholders it is supposed to be but just a toothless poodle of the Fonterra Board.

Unfortunately, these latest problems have left Fonterra’s latest capital raising efforts in trouble and farmers questioning the real motives of the co-op and its own shareholder watchdog. Both are now looking very shaky.

Surprise, surprise; the Greens launch its new, clean river initiative and once-again farmers are at the brunt of the party’s animosity and revenue gathering plans.

It now wants to charge farmers for the water they use for irrigation as part of its new plan to clean up New Zealand’s waterways. Farmers would be charged 10 cents for every 1000 litres of water. The plan also includes setting minimum standards for water quality.

As Federated Farmers water spokesman Ian Mackenzie says irrigation is not the cause of water quality problems. He also makes an excellent point about the stupidity of the Green’s policy and the idea that taxing Canterbury farmers to sort out problems in the Manawatu River as a rather strange concept.

Mind you, probably no stranger or nuttier than most Green Party ideas. In fact this is highlighted by the fact the Greens’ new clean water policy was launched with a vegetarian barbeque, live music and face painting – a real circus if there was ever one!

The Greens say the government’s current policy on freshwater management is too weak.

“Our standards for clean water will set limits to the amount of water being taken from our rivers and lakes, and the amount of pollution going into them.”

It will also require stock exclusion from rivers and lakes within five years. Planting riverbanks and excluding stock from waterways has been shown to significantly improve water quality within three years, the Greens say.

Yes, that is right and you know how we all know this? Farmers have been planting riparian strips around rivers and lakes bordering their farms for years – off their own bat and or in conjunction with local councils.

The new river policy is one of the Greens’ three election priorities and comes on the back of its claims that more than half of New Zealand’s rivers are unsafe for swimming.

“Our two biggest export industries, tourism and dairy, they both rely on the clean green brand to sell food to the world and to invite tourists here,” Russel Norman claims. “Our clean and green brand underpins our tourism and agricultural exports.”

Funny, as Norman and the Greens tend to spend most of their time bagging the dairy industry and farming in general and now its latest policy initiative wants to tax farmers more and limit where they can graze stock.

That’s hardly a recipe to encourage more growth in our most productive sector and putting a price on water used for irrigation is not the way to go to improve water quality.

Unfortunately, the Greens latest policy initiative is a case of different day, same crap – its blames all water quality problems in this country on farming and then wants to impose a tax to fix it. That is not an answer it is ideology and bad ideology at that!

It looks as though New Zealand could once-again be living off the sheep’s (and cattle beasts’) back – and not just relying in the dairy sector – to help get our economy back in the black

While most reports on the agri-sector concentrate on the high-performing dairy industry; latest figures show the country’s red meat producers are also doing their bit. According to the latest export figures; earnings for New Zealand sheep and beef totalled $5.8 billion last year – an increase of 9 per cent.

This increase in red meat export earnings occurred despite Beef + Lamb New Zealand’s annual stock survey showing sheep numbers down 2.1 per cent to 31.9 million. Meanwhile, the beef herd has stayed almost static at 3.9 million in the year to June 30.

Economist Rob Davison says the decrease in sheep numbers flows on from a tough spring in 2010 that resulted in a low supply of lambs this year. “This in turn has cut back the supply of lambs that can be held over as future breeding flock replacements.”

Davison says tight global supplies of lamb and sheep meat has seen world market prices lift significantly.

World market lamb prices were also up significantly on the previous year but the lamb supply from New Zealand remained constrained from the previous spring’s poor lamb crop.

In the year ended June 30, lamb generated $2.7 billion, which is 3.4 per cent ahead of last year but from reduced export volumes.

“The decline in the ewe flock has ensured mutton exports receipts were the standout story – up 35 per cent to $580m with the volume shipped up 15 per cent, Davison says.

Beef export receipts at $2.5b were up 14 per cent despite the volume shipped decreasing three per cent. 

Meantime, early expectations are for this spring’s lamb crop to be up 1.4m on last year’s poor result to 26.2m lambs – yielding 20.1m lambs for export. 

This is more proof that the red meat and white gold of New Zealand’s agricultural sector is providing the much-needed black ink for the country’s economy and the folly of claims made by politicians and others a few years back that our agri-sector was a sunset industry.