Wednesday, July 6, 2022

China to remain key to dairy industry health

The growing importance to the New Zealand dairy industry of China and the impact of a strong exchange rate on farmer returns have drawn a lot of recent comment.

The Economist reported that cows drove the NZ economy, with dairy products accounting for a quarter of exports, giving the country a third of the world’s dairy trade. Fonterra was credited with making some smart investments in Asia and Latin America, where demand for dairy products is growing, but in mature markets, health worries and higher prices have cut demand.

Chinese competitors were also a growing threat, the publication said. While about a fifth of NZ’s dairy exports went to China, and it made dairy products there under local brands, the Kiwi dollar’s strength was making it easier for Chinese rivals to win market share.

Despite the high dollar foreigners are also keen to invest in Fonterra. The Wall Street Journal reported in mid-November that the China Investment Corp, an investment institution and wholly state-owned company of the People's Republic of China, was considering a stake in Fonterra's new unit fund. While the co-op wasn’t commenting it made no secret of signing an investment agreement with Yutian County in China to develop two more large-scale dairy farms 120km east of Beijing. The two farms, which will complete a hub of five farms in Hebei Province, will house about 3350 milking cows each and collectively will produce up to 65 million litres of milk a year when they are fully operational.

Meanwhile, Landcorp is forecasting substantial lifts in its dairy production, partially from managing the former Crafar family farms on behalf of Shanghai Pengxin of China, which takes ownership this month.

Shanghai Pengxin will spend more than $15 million over three years to lift production on the 16 farms in the North Island to about 5m kg milksolids (MS)/year. It’s also continuing to expand dairy production on the Wairakei Estate in the central North Island.

Improving outlook

Alan Levitt, vice-president of communications for the US Dairy Export Council, was optimistic about China’s potential. Writing in Agri-View, Wisconsin’s leading agricultural newspaper, he said there was aggressive investment in China’s domestic dairy industry but he was sure China would remain a net importer of dairy products for years to come.

Among other factors, such as the lack of infrastructure or feed and water, production costs were much higher than in the US and importing its dairy product needs was cheaper than producing it itself..
Levitt acknowledged concerns that China’s growth streak might be coming to a close, and together with it the nation’s impressive dairy import run fuelled by economic expansion. But he was confident its economy and its appetite for dairy products would continue to expand. Its domestic dairy industry would fail to keep pace with demand and dairy imports would continue to grow, even from today’s sizable volumes.

Levitt’s optimism is underpinned by his belief that China’s leaders realise the country cannot stake its future solely on exports. Policy will be aimed increasingly at transitioning to a consumption-based economy.

Salaries are still rising, the population is growing more urbanised and consumers are buying more dairy products and paying a premium for imports because of ongoing concerns over domestic food safety.

Demand was resilient, he believed,citing data for the first nine months of this year showing China’s whole milk powder (WMP) imports grew 12%, whey product imports rose 21% and non-fat dry milk/skim milk powder (SMP) imports jumped 57%.

In those nine months China bought 728,016 metric tonnes of those three products combined – an increase of 131,651 tonnes (22%) over January-September 2011. Cheese and lactose imports were also up double digits, but at lower base volumes.

While China was already the world’s top consumer of infant formula, many analysts expected the country’s one-child policy would be loosened to counter an expected shortage of workers in the future, meaning more milk powder and formula would be required.

China’s importance to the NZ economy and to dairying shows up clearly in merchandise trade statistics.

Exports to China increased $88m (23%) to $468m in September. The rise was led by WMP, up $42m.

The country’s total exports (seasonally adjusted) increased 5.1% ($576m) to $11.9 billion in the September 2012 quarter. Milk powder, butter, and cheese led the rise with a 16% ($450m) increase. This reversed a 3.8% fall in the June quarter.

Quantities for the September quarter rose 34%. Monthly exports in September were valued at $3.3b, down $136m (3.9%) from September 2011. Milk powder, butter, and cheese exports fell $77m (11%) to $597m.

This decrease was led by cheese, down $30m (39%), and butter, down $25m (30%).
The trend for milk powder, butter, and cheese appeared to be increasing since May to a new high in September, Statistics NZ said.

In its November analysis of economic data, the Treasury partly attributed the recent pick-up in commodity prices to a stabilisation of growth in China and to the drought in the US. It expected NZ’s terms of trade to trough during the second half of this year before increasing again. The rise should provide a boost to incomes, helping to drive growth in the economy over the medium term, but this outlook was not without risk, and was dependent on ongoing strong demand from emerging markets, particularly China, it said.

The pick-up in commodity prices continued in the ANZ Commodity Price Index in October, which recorded its third consecutive monthly rise (up 1.3% from September and 5% above its recent July low). But it was 16% below the high recorded in April last year.

Cheese prices lifted 4%, closely followed by a 3% lift in the prices for butter and milk powders.

The exchange rate firmed slightly in October against the greenback, yen, pound and Australian dollar, and weakened relative to the euro. The world-price increase of 3% for dairy products was shrunk to 2.8% on the NZ dollar index and the 7.1% decline in world prices from October last year became a decline of 10.7% in NZ dollar terms.

Confident

Thanks at least partly to the exchange rate’s strength, the agriculture sector was the least confident in the October National Bank Business Outlook. Cameron Bagrie, the bank’s chief economist, said the agriculture sector was the nucleus of the country’s income-generating capacity.

“So when the rural pulse keeps getting weaker we take note.”

Sentiment in the agriculture sector had been sliding for months because of the high NZ dollar, a lower dairy payout, nervousness about environment regulation and the levelling out of a production boost from good weather, he said.

Reserve Bank Governor Graeme Wheeler said early in November the bank would like to see a lower exchange rate, provided it could be achieved without damaging price and financial stability.

He ruled out foreign currency intervention, saying it was unlikely to have a sustainable effect on the NZ dollar, although he conceded it could have an impact in the short term.

To achieve a sustained reduction in the NZ dollar, he said, it would be necessary to alter the overall level and pattern of saving and investment in the economy.

“In particular, it will be necessary to tackle our addiction of depending on foreign savings to finance our consumption and investment.”

Support for measures to lower the currency to help lift dairy farmers’ incomes came from a surprising quarter, Green Party co-leader Russel Norman. He cited the Ministry for Primary Industries’ (MPI) latest Farm Monitoring Report (see story page 17) and its prediction that total income from MS would fall 20% next year, resulting in a drop in profit before tax of about 57% for dairy farmers.

“Our dairy export sector is forecast to be in for one hell of a shock next year,” Norman said.

“A lower Kiwi dollar would help soften the likely impact of lower dairy prices in one of our key export sectors.”

He renewed his calls for reform of the Reserve Bank mandate and the way it made its decisions around the official cash rate (OCR).

 Fonterra’s China move examined

Two political scientists from Victoria University’s China Research Centre, Dr Marc Lanteigne and Dr Jason Young, are examining Fonterra’s investment in dairy farming in China as part of a study on the bilateral impact of the New Zealand-China Free Trade Agreement.

The overall goal of the project, Young said, was a better understanding of how China’s commercial diplomacy in NZ was affecting both countries’ economic and political policy.

Foreign companies traditionally shifted manufacturing to China, then sold their products to the Western market, but Fonterra was following a new model and selling the product within the domestic market.
Chinese companies were also starting to buy NZ dairy farms and processing companies.

“Consumers within China have a great deal of respect for the NZ brand,” Young said. “If a Chinese company can produce milk within NZ, process it, then brand it and sell it in China as NZ milk, it could be a highly lucrative business.”

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