There are positives for New Zealand in low the current low milk prices. These low milk prices will benefit the New Zealand dairy industry in the long term as it will limit the size of European expansion.
There is a cost war is going on between New Zealand and Europe at the moment. Quotas have come off production in Europe so they are expanding milk production.
Growth in exports of European skim milk powder
This is similar to what is happening in oil with expanding production due to shale gas. With oil, the low prices are benefiting the low cost producers such as Saudi Arabia can produce oils for $10-$20/barrel. Whereas shale gas oil costs $50 to $100/barrel.
Ireland, for example, is planning to increase milk production by 50 per cent.
New Zealand is the Saudi Arabia of milk and we can be the lowest cost producer, but dairy farmers need to focus on grass based production to weather the storm. Grass will always be the lowest cost source of feed and New Zealand has the most efficient grass- based dairy system in the world. “Ireland can grow grass too but currently they utilise less than half what they grow. The large housed dairy operations in Europe are also only profitable at high milk prices.
We need to focus on what we are good at, which is grass. The halcyon days may be gone for a while though and we are unlikely to see high prices again soon. It is going to be a slow recovery of price and dairy farmers need to be able to be profitable at $5/kgMS or they won’t survive. The average milk price over the last 10 years was around $5.50/kg MS.
Trend in global dairy prices
It is likely that this will be similar over the next decade as well. What we are seeing though is greater volatility. This is going to continue so farmers need to have systems that are still profitable when the price is low. The most resilient system is the low input grass based system.
As an economy we also need to see the opportunities in other areas, he adds.For example there have been record high returns for beef in the first six months of this season, with the average per tonne value up 28 per cent. Beef is a great story with China needing to increase its beef imports by up to 20 per cent a year for the next five years to meet its surging demand for protein.
The majority of our dairy exports exports are commodities
Lamb also has good prospects, and there are other opportunities, such as can be seen with the growing sheep dairy industry. We also need to continue to focus on growing the value of our dairy exports by moving away from exporting commodity whole milk powder.
Chinese investment New Zealand agriculture is a controversial topic. Should we be selling iconic New Zealand farms such as Lochinvar Station to Chinese investors? The recent announcement of the purchase of Lochinvar Station by Shanghai Pengxin Group Co Ltdhas brought the issue of Chinese investment to the surface again. The following article was written by Leanne Clemens as part of the Lincoln University course “Agribusiness Strategic Management” which I teach. This article provides a student perspective on Chinese investment New Zealand agriculture
Leanne has just completed a Bachelor of Commerce in Agribusiness and Marketing at Lincoln University.
Chinese investment in New Zealand agriculture is positive as it allows for growth of the industry. A controversial issue, land sales to foreign owners in particular gains much attention however, there are a number of aspects that benefit New Zealand and ultimately lead it toward it being a positive move. The following report details how Chinese investment in New Zealand agriculture takes advantage of the market opportunities and access within China, allows growth of New Zealand firms, furthers the relationship between the two countries and creates jobs and opportunities for New Zealanders. In contrast to those views, the report will examine why fears of Kiwis of losing land to foreigners is largely unwarranted.
The New Zealand government has a clear focus on international trade and the Prime Minster believes increased Chinese investment is inevitable. The NZ Inc. China Strategy has the goal to increase bilateral trade to levels that reflect the growing commercial relationship. This will see two way investment rise and more resources allocated to encourage focused investment from China. Similarly, New Zealand relies on overseas investment to achieve economies of scale and gain access to markets and consumers. Even historically New Zealand has been home to investment from foreign firms dating back to the 1800’s in industries such as sealing, flax and timber.
Deputy Prime Minister Bill English believes that foreign investment between China and New Zealand is critical, and that our economy and living standards depend on the prosperity of our trading partners. Without this foreign investment he warns that New Zealand would face an increase in the cost of capital leading to reduced employment options, restriction to business growths and a decline in household incomes as a nation that doesn’t save enough to meet the demands for growth, investment allows us to meet those needs. As China is one of the fastest growing economies and New Zealand’s future growth depends on access to capital, knowledge and skills it is only natural that China would be interested in investing in New Zealand.
New Zealand Trade and Enterprise [NZTE] are at the front of this movement toward foreign investment, and in particular China. Advocating that “safety, stability, ingenuity, and proximity to Asia’s booming economies are just a few of the reasons to invest in New Zealand. NZTE also believe that Chinese investors can inject well needed market knowledge, networks, expertise and capital to a New Zealand firm. NZTE’s mandate is helping potential investors take advantage of what New Zealand has to offer. For example, NZTE and the Taupo District Council are currently looking for Chinese investors for what is dubbed a ‘mega-mill’ in the central North Island. With China as the largest export destination for wood products a joint venture with a Chinese firm could help get more value out of the logs and give it the capital required to create the scale needed.
Canterbury Pure Infant Formula. Produced by Synlait and marketed in China by Bright Dairies
Foreign investment also provides a source of capital allowing expansion such as the case of Synlait Milk and Bright Dairy of China. In 2010 the two firms became partners, giving Synlait Milk the capital required to expand and build its infant formula plant and gain good market access in China through partnering with one of the leading dairy companies. Since then Synlait Milk have gained momentum and now employ over 150 staff, have recently listed on the New Zealand share market and picked up an award at the China Business awards. As an example, the partnership between China and New Zealand has had benefits for both parties and has created a number of job opportunities in the Selwyn district and given milk suppliers other options in supply.
Synlait Plant at Dunsandel
Congruent with providing a source of capital to allow expansion Eion Garden, Chairman of Silver Fern Farms stated that one of the major challenges within the meat industry is the lack of capital. Silver Fern Farms have recently created a joint venture project with an American firm and will be constructing a $22m plant in Palmerston North. This demonstrates how foreign investment can provide the capital needed to grow an entire industry.
Yashili Plant at Pokeno
A further example of positive outcomes from Chinese investment in the New Zealand agriculture is Chines Dairy Company, Yashili’s plans to build a $210 million milk processing plant in Pokeno. Yashili is one of China’s largest infant formula and soymilk powder makers. Residents are happy with the plan as it will bring at least 100 jobs to the area. The town is looking forward to the growth opportunities for new businesses with a 7000 person population jump expected. Yashili will be using New Zealand suppliers, boosting employment and paying taxes here, all which will benefit the New Zealand economy.
Some might argue that the benefits of foreign investment by the Chinese does not outweigh the disadvantages and wish to keep New Zealand assets in New Zealand hands. A survey in 2011 showed that Kiwi’s wanted to benefit from exporters, rather than foreigners benefiting from exports. Farm ownership in particular is a sensitive issue, exacerbated by the attention of the Crafar Farms sale to Shanghai Pengxin. The sale saw significant opposition from within New Zealand and ultimately led to a review of the Overseas Investment Act. China is also aware of New Zealand’s concerns about land purchases to which the Chinese Ambassador stated that Kiwi’s ‘over thought’ the issue, signalling that further large land acquisitions were unlikely.
The Overseas Investment Act underpins the investment goals of NZ Inc. strategies. Since the Crafar Farms acquisition it is now a more difficult and timely process to gain consent to purchase in New Zealand. A spokesman for Bill English states that “we have tightened the rules on foreign so that foreign investors have to show there will be real and tangible benefits to New Zealand if they want their application approved”. Proving this is not simple and the Act regulates purchases of sensitive land, significant business assets and fishing quotas. John Key has also made it clear to China in recent talks that he would welcome investment, so long as it benefits New Zealanders and it not attempts at buying up farms. This Act is in place to ensure that New Zealander’s don’t lose one of its most precious resources; land, and part of what makes it unique as a country.
Oceania Dairy Limited’s new factory at Glenavy. Oceania Dairy Limited is a wholly-owned subsidiary of Inner Mongolia Yili Industrial Group (Yili)
Not only are there specific regulations surrounding overseas investment one could argue that Chinese foreign investment has been exaggerated by the media. Currently foreign direct investment between the two countries is relatively small. A report by KPMG it showed that in the three year period ended 31 January 2012 Asia only accounted for 16% of gross foreign direct investment, with Australia far ahead. However, the report did state that investment from China was likely to rise with such investments as Yashili in the dairy sector. Looking specifically at land acquisitions KPMG show that China / Hong Kong are 14th while the UK and United States are major investors in land (for the three year period ended 31 March, 2012). While common conceptions are that China are dominating investment in New Zealand the statistics show a different story with Australia, North America and Europe accounting for around 70% of investment over that time period.
Fonterra Farms China
The relationship between China and New Zealand has also paved the way for New Zealand investment in China. Fonterra has plans for 15,000 cows in China with the goal to produce one billion litres every year by 2018. This allows a New Zealand company to export its technical prowess and skills in milk production while taking advantage of the opportunities of being so close to its market. Like Chinese firms investing in New Zealand, Fonterra will be hiring local staff which benefits those regions.
Ultimately foreign investment in New Zealand by the Chinese is a positive move as it creates scope for growth. Historically New Zealand has been tied to foreign investments as the country does not have the wealth of older countries. Foreign investment allows New Zealand better market access, such is the case with Synlait Milk and Bright Dairy, and it also provides well needed capital to fund expansion, such is the case with the proposed ‘mega-mill’. The investment also provides opportunities through jobs which creates a growth in wages, and contributes to improving New Zealand’s standard of living. Despite the concerns about land acquisition by the Chinese the Overseas Investment Act ensures that investment will benefit New Zealanders.
Akara Infant Formula produced by Synlait for New Hope Nutritional Foods (Akara is a Chinese transliteration of Akaroa)
For most of the last century New Zealand has led the world in efficient production of agricultural products. By the 1950s New Zealand had one of the highest standards of living in the world. This comfortable existence was shaken by the rise of agricultural protectionism and support mechanisms in the 1970s. New Zealand was shut out from traditional markets and needed to compete with subsidised exports that drove down international commodity prices. This began a long decline in New Zealand agriculture, highlighted by Prime Minister, David Lange’s, famous statement that “Agriculture in New Zealand is a sunset industry and manufacturing and tourism will take over.” Fortunately for New Zealand, the demand for our agricultural products is increasing. The rapid urbanisation and economic growth in Asia has seen unprecedented growth in a middle class that is driving demand for New Zealand’s meat and dairy products
While this is good news, it also presents a significant challenge. How can New Zealand turn this period of high agricultural commodity prices into sustainable long-term prosperity? New Zealand, potentially, risks becoming dependent on China in the same way it was dependent on Great Britain for most of the 20th century. Once again, New Zealand may become vulnerable to volatile international commodity prices and changes in foreign countries’ agricultural policies.
Today I begin three weeks of research interviews in Europe on how to increase the value of New Zealand food exports by communicating the “credence attributes” to consumers (see current research for more information). “Credence” means things like our clean green image, animal welfare, food safety or anything else you can’t experience by consuming the product.
I will try to share some of the experiences that won’t be so easy to describe in a written research report, and also encourage readers to make comments, as many of you will have had your own experiences and thoughts that can add to this.
Credence: belief as to the truth of something: in other words attributes that need to be taken on trust, you cant experience them in the product as you can with taste or appearnance
2015 is the last year that the EU will have a quota on milk production (expires 1 April 2015). This means after that there will be no restrictions on increasing milk production. Currently if farmers produce over their milk quota they pay a penalty of 28 EUR/100 kg. In countries like the Netherlands the current high milk price means farmers are producing above quota and willingly paying this penalty.
EC’s quarterly agricultural outlook shows that the number of EU dairy cows increased significantly in 2013. The 2013 increase was greatest in the Netherlands (+3.6%), Spain (+3.6%), Ireland (+2.1%), Germany (+1.8%) and France (+1.5%).
Should New Zealand dairy farmers fear surging European Union milk production where there are 22.8 million dairy cows compared to less than 5 million in New Zealand.
Source: Ernst and Young 19 September 2013: Analysis on future developments in the milk sector Prepared for the European Commission – DG Agriculture and Rural Development
The reality is that most of the European Union milk production is consumed internally. Even so the European Union (EU) remains the one of the world’s major dairy exporters accounting for about 32 per cent of all export sales on a milk equivalent basis. Most of this comes from three countries, Germany, the Netherlands and France (see Figure 20).
The good news for New Zealand is that most of this is exported as Cheese. The European dairy industry is set up mainly to produce fresh milk and cheese, producing about 40% of total world cheese production. This means most of the increase in European production will go into cheese exports
Although only producing 3 per cent of world milk output, New Zealand is the second largest supplier of manufactured products to the world market with a 32 per cent share. However the largest share of this goes as whole milk powder. Cheese exports represent only about 15 % of New Zealand exports.
Source: Ernst and Young 19 September 2013: Analysis on future developments in the milk sector Prepared for the European Commission – DG Agriculture and Rural Development
So there may be a significant increase in production from the European Union, stimulated by high prices and the removal of quota, however this is most likely to affect cheese and skim milk powder exports. Figure 13 shows the changes in European dairy product exports and it can be seen there is significant growth in skim milk powder and cheese.
The removal of quotas in 2015 is likely to result in a decrease in small farms and an increase in larger operations in countries like Germany and the Netherlands. The long term effect is that the European Union is likely to become a stronger competitor on the international market as the industry in these countries become more competitive and able to respond to market signals.
In the long term New Zealand must remember that it is a small player in the overall dairy production market. Small changes in production and exports in the European Union or the US can have big impacts on the small percentage of dairy products that are traded (About 7 per cent of global milk production is traded in international markets each year). Small changes in demand for imports from countries like China can also impact significantly on dairy prices. The one thing that is for sure is that record dairy prices won’t last for ever. High prices will stimulate an increase in production from the most efficient producers until prices reach a new equilibrium. In the long term New Zealand will still have to be innovative in production and marketing to maintain its competitive advantage in the brave new word post EU quotas.
The full Ernst and Young Report : Analysis on future developments in the milk sector Prepared for the European Commission – DG Agriculture and Rural Development. Is available on the resources section of this site click here
There are positives for New Zealand in low the current low milk prices. These low milk prices will benefit the New Zealand dairy industry in the long term as it will limit the size of European expansion.
