Fairton closure inevitable

Wednesday’s announcement by Silver Fern Farms of the proposal to close the company’s Fairton plant was in many ways inevitable. Even the workforce appears to have been resigned to the probability for several years. Sad as it is for workers and the Ashburton community, it is better to front up to the certainty than to have to wait for the axe to fall.

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Tatua result and forecast cast doubt on Fonterra’s strategy

Tatua’s amazing final payout of $9 a kilo of milk solids, trumping Fonterra’s $8.40 (admittedly after adjusting the milk price calculation) is just one element of an impressive performance by one of New Zealand’s most consistent performers.

 

The forecast of $6.50 for the current season compares with the recently adjusted $5.30 announced by Fonterra. It may not survive the vagaries of the season, but then neither may Fonterra’s significantly lower number.

 

Tatua also announced an increase of 10 in supplying dairy farms, rising from 109. Presumably the company won’t have any trouble filling this new requirement, because being selected as a Tatua supplier must be a bit like being picked as a permanent member of the All Blacks. The only problem is to qualify the farm has to be in a very small part of the Waikato within reach of the plant.

 

At a time when Fonterra’s sheer size casts doubts on its ability to add value to its product range, not least because its cooperative members expect maximum payouts, Tatua is a great example of a small niche company which has built its business on value added products.

 

It is not easy to be in Fonterra’s shoes: it must collect, convert into product and market the output of more than 10,000 dairy farms. Tatua in contrast has only a fraction of this number of farms and, if it needs more milk at any time, it can apply for an allocation under the provisions of DIRA. Synlait is an example of a well structured niche player in the South Island which has been successful because, not in spite of, its size.

 

But the suspicion remains, Fonterra’s scale may be both an advantage and a curse. It is very difficult to convince members they should be willing to forego payout in exchange for investment in brand building, but that may be just what the company should do, if it wants to compete with the big consumer goods companies like Danone and Nestle.

 

In the interest of ensuring above board milk pricing and the preservation of fair competition between dairy companies, Fonterra must calculate its milk price based on the milk price manual. This involves using a basket of commodity reference products such as whole milk powder and skim milk powder and their by-products, but excludes lower value products such as cheese. These price calculations are closely linked to Fonterra’s monthly global dairy trade auctions which have incidentally been dropping like a stone in recent months, since unrest in the Ukraine, resulting Russian trade embargos on European product, and a slowdown in China purchasing.

 

However the fact remains, Fonterra is heavily bound and constrained by commodity markets and their price structures. Fonterra claims with justification that it is a major world supplier of ingredients, not so much a branded goods marketer. But a report just released shows Fonterra to be lagging way behind its major consumer goods competitors in spite of its production capacity.

 

It has become axiomatic for the dairy industry to be held up as a model of how an agricultural industry should be in contrast to the meat industry. The cooperative nature of dairy, purely because a dairy farmer’s milk must be collected every day, has compared very favourably with the competitive nature of the meat industry. Higher payouts have merely served to confirm this viewpoint.

 

But it looks as if the dairy industry has its own particular problem which is how best to convert what it produces into something worth more than just a commodity.

Debt is good under some circumstances

After my column last week about meat industry debt levels, Keith Cooper, CEO of Silver Fern Farms, took me to task for incorrectly reporting the situation with Silver Fern Farms’ debt facility.

Meat industry not broken, but collaboration essential

There’s plenty of publicity around concerning the broken state of the meat industry, but it seems to be coming from a comparatively small number of people wanting to convince everybody else disaster is imminent.

Trust and commitment essential to meet the meat industry’s challenges in 2010

It’s time for a bit of crystal ball gazing, as we start a new year, although admittedly the end of the calendar year isn’t anything significant in farming terms. After all the pastoral season finishes at the end of September and the dairy changeover happens end June. Calving and lambing are long since over, hay and silage are in the barns and farmers have to continue with routine maintenance, while making sure they make the right decisions on stocking rates heading into the summer.

Meat industry strategy under way soon, but unlikely to produce hoped for results

It’s strategy development time again, now Meat & Wool NZ (MWNZ) has announced how it intends to restructure itself to address the removal of wool from its activities and a seriously reduced operating budget. After the release of MAF’s report in June which proposed four scenarios, but deliberately no recommended course of action, MWNZ took responsibility for leading the strategy development process

Hard to see where $150 will come from for a few years

Although the T150 call from Bruce Wills, Federated Farmers Meat and Fibre Chairman, is notable for its optimism more than its reality, you have to admire the sentiment behind the campaign. He knows it will be a hard target to achieve within the five year timeframe, but he says it’s necessary to instil confidence in the prospects for sheep farming among sheep farmers, otherwise more and more will get out, whether into dairy farming, dairy grazing or by selling out.

 

Bruce Wills sees improved returns coming from both supply chain efficiencies and increasing the percentage share of the retail value of a lamb. These comments, while taking a positive approach to a seemingly insoluble problem, won’t actually make any difference on their own without concerted action by everybody in the industry to process and market lamb a lot more effectively than has been the case in the past.

What is right size is $64,000 question

The interim profits announced by PPCS and AFFCO, the only two meat companies required to publish results at the half year, represent a significant improvement on last year, contrasting strongly with farmers’ returns.

 

This underlines the inevitable reality of the meat industry which can be summarised in a nutshell: when there’s plenty of grass, farmers have choice and can feed their livestock until they’re ready to go to the works or saleyards, whichever is paying the best money, but in drought conditions most can’t get stock to the works fast enough, regardless of the price.