Wednesday, 9 March 2016

Winston Peters - "Trade with Russia"

Winston Peters, the realist, speaking. He remembers how NZ kept trading with Iran after 1979.

Sell milk to Russia, Winston Peters urges in face of Fonterra pay out drop
Dairy farmers should be allowed to sell milk to Russia rather than go bust, Winston Peters says
Fonterra milk truck

9 March, 2016

The NZ First leader has criticised Prime Minister John Key in parliament for the government's support for sanctions against Russia over the Ukraine conflict.

"Why has he denied farmers a chance to trade with the world's second biggest dairy importer, Russia, considering there has been another drop in Fonterra's milk price, disastrously, from $4.15 to $3.90?" he said.

"Why is he willing to allow more dairy farmers to go bust while he remains tied down by an informal, off the cuff, golf course agreement with (US) President Obama?"
Winston Peters
Winston Peters   Source: ONE News

Mr Key said Mr Peters' description of the agreement was "quite wrong" and went on to urge him to support the Trans-Pacific Partnership.

"The single biggest gainers out of the TPP are dairy farmers," he said.
"Rather than some mythical Russian who might want to buy something, I can show him 800 million consumers who definitely want to buy something."

Mr Key suggested Mr Peters study economics "and work out that they have got no money to buy anything through the front door or the back door - that is the reason prices are going down, Russia is in serious financial difficulty because of oil prices."

Fonterra price drop 'gut-wrenching'

Dairy cow close up generic

Fonterra today lowered its forecast payout by 25 cents to $3.90 per kilogram of milk solids and it's expecting milk production to be down 4 percent on last season, as farmers respond.

The cooperative's forecast has dropped by 70c in the past two months in response to the a glut of milk around the globe, ramped up production in the European Union, falling oil prices, sanctions against Russia and weak Chinese demand.

Just two years ago, Fonterra farmers received a payout of $8.40 per kilo of milk solids.

Matthew Zonderop, a dairy farmer in the Matamata Piako region, has been in the industry for 12 years and said he hasn't experienced a time like this.

He's 50-50 sharemilking 200 cows and receives 50 percent of the forecast milk payout as his income.

"This one is really gut-wrenching. It's going to make things a lot harder.

"We're just going to have to justify every single it's almost like the tap is turned off and things are really going to be affected on the farm, not only for me but for a lot of people.

"Maintenance is going to definitely be deferred, animal health...not animal welfare, but animal health, things like dry cow therapy will be cut, herd testing, mating - anything to do with those things for autumn calving.

Business margins would be extremely close now, he said.

"As soon as we turn the plant on, start a bike, do anything, it's going to cost us money. We looked at that we could scrape through only just, but now it doesn't look like we'll come above any sort of profit this year."

People are questioning how they'll be able to farm out of the lows, he said.

While he has not seen farms for sale in his area because of the low dairy prices, sharemilkers were the hardest hit, he said.

"Sharemilkers, lower order sharemilkers...some of them are going to be seriously affected and will be exiting the industry at the end of the season."

He has called on Fonterra to make cuts, while its suppliers are having to do the same.

"I think they can be doing more. I hate to say it but I think they've got to start cutting wages themselves, it's just the only way that they're going to be saving more money to put back into the farmers a cooperative, and one way to do that is start cutting staff wages."

Farmers seek accounting advice

A rural accounting specialist in Canterbury says he feels more like a social worker than an accountant at the moment.

Pita Alexander said his phones are running hot from clients in the dairy and other rural sectors.

The latest Fonterra payout revision means many dairy farmers will be looking at a loss of about $1 per kilogram of milk solids, Mr Alexander said.

"By the 31st of May 2016 we need an improvement so we are not looking down the barrel of a loss for the 31st of May 2017 of anything like a dollar a kilogram, because that will cause trouble."

It was an art form to maintain production on an owner-operator dairy farm and at the same time get farm expenses down, he said.

"The very good operators can operate at $3.80, one or two even lower, but anyone who is going to push them much lower than that is going to struggle to keep the per-cow per-hectare production figure on the other side of the ledger."
Dairy farmers were listening more to their advisors, he said.

Fonterra faces liquidity issues as rivers of “white oil” dry up

8 March, 2016

Pundits, most residing in the National Party, just three years ago predicted the economy would surf high on “rivers of white oil” flowing from the dairy industry, but they now have cow pats splattered on their faces as Fonterra today announced another payout downgrade and signalled liquidity pressures.

Fonterra’s move to demand 90-day terms from its 20,000 suppliers indicated the dairy giant is experiencing working capital and or cashflow problems, suppliers and shareholders said today.

What is going on with their liquidity?” asked investment consultant Will Wilson who owns several dairy farms and is a Fonterra shareholder. “You have to start asking questions – how commercially sound is their business?” he told RNZ today.

He said the announcement that Fonterra has decided unilaterally to change its terms of trade to stretch payments out from the usual 30 days while also requiring suppliers to look for cost reductions of 10-20 percent “indicates there is pressure on liquidity”.

Fonterra Chief Financial Officer Lukas Paravicini told The Standard the price cut “illustrates the challenges facing New Zealand’s dairy sector and the pressure continuing low global dairy prices are having on our farmers’ businesses”.

Paravicini would not comment on whether the company was experiencing cash or liquidity pressures although he said Fonterra was on track to reduce its gearing (debt to equity) to 40-45 percent.

He said the move to the harsh terms of trade was in line with its “global standard” and ‘it is about being efficient as possible and driving as much cash back to our farmer as possible.

Fonterra’s announcement today that it is again slashing its farmgate price for milk by another 6 percent to under $4/kg of milksolids puts the industry into the “severe” scenario outlined in the Reserve Bank’s most recent Financial Stability report.

The cut to the farm payout to $3.90/kg of milksolids, down from the previous already dire forecast of $4.15, will put intense strain on the wider economy because of Fonterra’s position as the dominant exporter.

It also has serious implications for the Government books and places doubt on the National Party’s plan to cut taxes as an election bribe.

It also exposes the paucity of National’s economic policy of reliance on commodities such as dairy powder, logs and oil and its failure to support value-added industries.

One Fonterra supplier said Fonterra’s requirement for them to cut costs by over 10 percent was intolerable.

It just doesn’t work. We are all struggling at the moment,” he told RNZ. “Loyalty is disappearing. A lot of contractors won’t give them the same loyalty and drop everything to help them out when their plant goes down because they are not good creditors.”

Because they are paying three months late, that indicates that they have a serious liquidity problem. What guarantees do Fonterra give all their creditors that they are good to pay their bills on time?”

The supplier labelled Fonterra as “corporate bullies” who want to “beat up their little suppliers”, while trying to portray themselves as good employers.

Wilson said Fonterra was using its suppliers to provide working capital, but suppliers still had to pay their own suppliers on the 20th of the month following as everyone else in New Zealand does.

Fonterra made the spurious claim the move in line with overseas practice.

The RBNZ in its November Financial Stability report noted suppliers were already under serious pressure from losses experienced by most dairy farms last year due to the severely curtailed dairy price.

The RBNZ’s baseline scenario had the Fonterra payout at $4.15. Even in November, the RBNZ said 11 percent of farm debt was owed by farms with negative cashflow. Under its severe scenario, nearly half of all dairy farm debt – amounting to over $38 billion (up 26 percent in five years) – will become non-performing loans. Those loans will be concentrated in a quarter of dairy farms.

Prime Minister John Key said banks would be patient.

They’re very much taking the view that they’re not going to rush to be forcing people off their farms, but inevitably there are a few that are going to be highly indebted.”

History would say that banks seldom exercise patience for long.

Debt soared during the dairy boom when the payout in 2013/14 jumped over $8/kg and people leaped on the bandwagon to buy dairy farms at inflated prices or paid high prices to convert forest and other pastoral land to dairy.

This week, the country’s largest farmer, Landcorp, announced it had abandoned a hugely expensive plan to convert land in the central North Island to dairy due to financial pressures.

The state-owned farmer forecast it would lose between $8-9 million in 2015/16 due to low dairy prices. It runs 17,000 cows on 6400 hectares on its 13-farm Wairakei Estate near Taupo. It had planned to run 43,000 cows on 39 farms by 2021.

Landcorp will also face serious cashflow pressure and will be forced by its banks, ANZ, ASB and Westpac, to sell assets at the bottom of market to repay debt. Last year’s Landcorp annual report showed its contracted capital for conversions would cost $35 million annually until 2019 and it then escalated to $229 million.

Landcorp costs before even debt servicing were up at at $4.82/kg of milk solids which is typical of the kind of poor economics of many of the recent dairy conversions.

At $3.90, the milk price is well below industry body Dairy NZ’s estimate break even at $5.25/kg.

Dairy prices rose marginally in the latest GlobalDairyTrade auction, breaking a run of four previous falls, but analysts see no immediate sharp recovery in prices due to over-supply from the US, EU and New Zealand combined with slacking demand from key consumer markets in China and Russia.

Financial analyst, commentator and Milford Asset Manager Director, Brian Gaynor recently noted Fonterra’s net debt has risen to $7.6 billion from $4.7 billion in 2011. That compared to farmer equity of just $5.8 billion and Fonterra’s own estimation of market value of just $8.9 billion.

Fonterra’s net interest bill in the latest year was $518 million.

Gaynor said that when Standard & Poor’s downgraded Fonterra’s credit rating in October to A-minus, it assumed a milk price payout of $4.60/kg. S&P then said Fonterra’s financial flexibility had diminished due to the speed and magnitude of the drop in global dairy prices relative to the level of advance rate payments to its supplier shareholders.

This also resulted in a material increase in its working capital at balance date, which added to the already elevated debt levels from capital investment and acquisitions during the year,” S&P said.

It noted Fonterra’s recent offer of interest-free loans to distressed farms, “in our view implies there may be limited headroom to lower the payout at the bottom of the global dairy product price cycle.”

Gaynor commented that Fonterra shelled out $364 million in capital investment on China last year and said it may have too many balls up in the air at once. Certainly, the value of its $615 million investment in Beingmate as a “game changer” in the infant formula market in China would have gone well south and will be just one more pressure loaded onto its books.

Fonterra is due to announce its financial results on March 23. We await with interest.

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