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
TVNZ,
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 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'
Photo: 123rf.com
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 cent....now 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.
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
pockets...as 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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