Milk and Dairy Products Report

An Expert's View about Dairy Products in New Zealand

Last updated: 15 Jun 2011

New Zealand Milk Supply is on track for record production in 2011 at 18.05m tons and dairy farmers are welcoming the forecast of the second highest payout ever for the milk supplied during the 2010/2011 NZ production season.

THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT POLICY Required Report - public distribution Date: 5/13/2011 GAIN Report Number: NZ1107 New Zealand Dairy and Products Semi-annual Milk Production and Dairy Products Report Approved By: Laura Scandurra Prepared By: David Lee-Jones Report Highlights: New Zealand Milk Supply is on track for record production in 2011 at 18.05m tons and dairy farmers are welcoming the forecast of the second highest payout ever for the milk supplied during the 2010/2011 NZ production season. A record 948,000T of WMP was exported in 2010 with exports of WMP to China jumping 72% from 2009. Executive Summary There is renewed optimism in the New Zealand dairy industry. International dairy product prices are high and the domestic farm gate milk payout price for the 2010/11 season is set to be the second highest on record. (The record was set during the 2007/08 season.) Fonterra, the farmer-owned cooperative that processes approximately 89% of the nation?s milk supply, is forecasting a payout of NZ$7.75/kg milk solids. The milk supply estimate for calendar year 2010 has been revised upward slightly to 17.2 million tons. Milk supply for calendar year 2011 is forecast to reach a record 18.05 million tons, a 1.2% increase over 2010. Total production in calendar year 2010 of the four main dairy commodities - whole milk powder (WMP), skim milk powder (SMP), cheese and butter/anhydrous milk fat (AMF) - is estimated at 2 million tons, 60,000 tons higher than the previous estimate. While the total production forecast for 2011 remains unchanged at 2.114 million tons, the estimate for WMP production has been revised upward by 13%. WMP tends to be more profitable than other dairy commodities and, reflecting this, nearly all of the processing capacity built over the last decade in New Zealand has been powder driers. Dehydrating is still the least cost way to process liquid milk into a more non-perishable form, which is important given New Zealand?s isolation and distance from markets. Exports are forecast to reach a record 2.4 million tons in calendar year 2011. Accounting for over a quarter of New Zealand?s total export receipts, dairy exports are critically important to New Zealand?s economy. While WMP exports are forecast to reach 990,000 tons, up from 948,000 tons in calendar year 2010, cheese exports are predicted to fall to 237,000 tons, down from 268,000 tons in calendar year 2010. China continues to be New Zealand?s top market for dairy exports, accounting for 17.4% in calendar year 2010, up from 12.2% the previous year. Leading dairy product exports to the Chinese market are WMP, SMP, and butter/AMF. New Zealand exports of WMP to the Chinese market jumped 72% in calendar year 2010 to 294,181 tons. Global Dairy Trade, Fonterra?s auction platform, continues to gain ground. Nearly a quarter of total exports, or 544,150 tons, were sold through the auction system in 2010. This compares to 10% of total exports, or 228,700 tons in 2009. WMP, SMP, and AMF make up the bulk of commodities sold on the platform. Rising retail milk prices have led to public and industry calls for an independent regulator of domestic milk prices. The New Zealand Commerce Commission has announced that it will conduct a preliminary investigation into the domestic milk market to determine if a full price inquiry is warranted. The Commission?s report is expected in the next couple of months. In spite of overwhelming farmer support, some speculate that election year hurdles could delay implementation of Fonterra?s ?Trade Amongst Farmers? (TAF). TAF would require farmers exiting the cooperative to find buyers for their shares rather than relying on Fonterra to redeem them. Fonterra competitors have expressed concern that TAF will lack sufficient liquidity, thereby preventing farmers from exiting Fonterra to supply competitors. Note: As of 2010, all PSD tables are calculated on the basis of calendar year data. The marketing year (MY) is now the same as the calendar year. Production Milk Supply MY2010 (Jan 2010 to Dec 2010) Although a severe September storm disrupted production, particularly in Southland and Otago, production during the second half of the year was slightly ahead (0.72%) of the same period last year with higher milk flows being recorded in four of the six months during the second half of the year. Reflecting this, the milk production estimate has been revised upward by 1.6% to 17.2 million tons. Sources: Livestock Improvement Corporation (LIC), DairyNZ, StatsNZ, Ministry of Agriculture and Forestry (MAF) Sources: Livestock Improvement Corporation (LIC), Dairy NZ, MAF, Stats NZ Sources: LIC, DairyNZ, StatsNZ, MAF New Zealand: Profitability of Dairy Farming (NZ Dollars per kilogram of milk solids) Key Indicator Category FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 Forecast Milk Sales 4.13 4.12 7.35 5.20 6.16 7.39 Livestock Sales & Sundry Income 0.21 0.31 0.45 0.45 0.37 0.40 Change in Value Livestock 0.24 0.16 0.15 0.02 -0.01 0.05 Total Gross Income 4.58 4.59 7.95 5.67 6.52 7.84 Farm Working Expenses 3.54 3.63 4.91 4.88 4.51 4.80 Operating Profit 1.04 0.96 3.04 0.79 2.01 3.04 Debt Servicing 0.98 1.01 1.30 1.58 1.51 1.40 Rent 0.10 0.10 0.09 0.12 0.15 0.15 Net Profit -0.04 -0.15 1.65 -0.91 0.35 1.49 Source: DairyNZ Milk Supply MY2011 (Jan 2011 to Dec 2011) The milk production forecast has been revised downward by 3.2% to 18.05 million tons, which is still a 5% increase over 2010. The current forecast is based on the following factors: The actual increase in cow numbers is not as high as originally expected and has been revised downward by 50,000 head to 4.8 million The La Nina weather pattern, which tends to brings warm dry weather to New Zealand, threatened drought like conditions in some regions of the country. However, rainfall levels have been relatively good throughout the country in 2011 Nationwide, milk production for the 2010/11 season to mid-April was running nearly 2.5% ahead of last year Current cow condition and pasture levels bode well for production during the second half of 2011 Some districts affected by drought in 2010 recorded daily milk flows in April 2011 between 50% to 100% higher than last year Levels of feed supplements on hand for winter and spring feeding (to top up pasture deficits) are reportedly good in the South Island, low in the Central Districts North Island, and tight in the Waikato Waikato farmers are reportedly planning to use imported palm kernel and cereal grains to top up supplement levels on an as-needed basis Increasing quantities of feed wheat are reportedly being imported from Australia Approximately 125 new dairy farms are due to begin production in August 2011, bringing an estimated 100,000 extra cows to milk Some sources report that, given the generally improved condition of New Zealand dairy farms, some of the latent production potential pent up by poor pasture growth in the past three seasons could be realized in the 2011/12 season. Anecdotally, at this stage, there are more cows than average that are not in calf, which could have a negative impact on production next season. Prices Fonterra is forecasting a milk price for the year of NZ $7.50/kg and distributable profits of 40-50 cents a share. However, the cooperative plans to retain between 15-20 cents a share, leaving a dividend of around 25-30 cents which would mean a final payout to the farmer shareholders of NZ$7.75/kg Milk solids. Westland announced a final payout forecast range of NZ $7.40 to $7.60 per kilogram of milk solids and said it was unlikely to beat its 2008 payout record of $8.29, before retentions. Payout Prices by NZ Dairy Cooperatives (Per Kg of Milk Solids) Company Payout Payout Payout Forecast Name 2008/09 2009/10 2010/11 Fonterra NZ $5.20 NZ $6.37 NZ$7.75 Ta $5.38 NZ $6.32 NZ$7.50-8.00 tua NZ We NZ $4.50 NZ $6.15 NZ$7.50 stland Sources: Tatua, Westland, Fonterra, Dairy Exporter Magazine Note: Payout includes raw milk price and dividend payout. Commodity Production Total production in 2010 of the main four commodities (WMP, SMP, Cheese and Butter/AMF) is estimated at 2 million tons, which is 60,000 tons higher than the previous estimate. The 2011 forecast remains unchanged at 2.114 million tons. (Note that all fat production is converted to a butter equivalent.) Whole Milk Powder (WMP) MY2010 Production is estimated at 947,000 tons, a 14% increase over the previous forecast. This translates into an annual growth rate of 23%, which is significantly higher than the long term trend of 6.5% to 7% p.a. Ending stocks are forecast at 100,000 tons, which is 67% higher than the previous forecast. The increase in WMP production will drive an increase in exports. MY2011 Production is forecast to expand further reaching 1,015,000 tons, which is 13% higher than the previous forecast. The increase reflects the expected increase in milk supply during 2011, which will largely be used to produce WMP. WMP tends to be more profitable than other commodities and, reflecting this, nearly all the processing capacity built over the last decade in New Zealand has been powder driers. Dehydrating is still the least cost way to process liquid milk into a more non-perishable form, which is important given New Zealand?s isolation and distance from markets. Butter and Anhydrous Milkfat (AMF) MY2010 Butter production is estimated at 441,000 tons, 2.7% less than the previous forecast and down 8.5% from the previous year. Relative export pricing has historically favored protein production over fat production. However, the picture changed in 2008 and 2009, when butter and fat production increased. MY2011 The production forecast has been revised downward by 9% to 454,000 tons. During early 2011, the price of AMF increased significantly in Fonterra?s Global Dairy Trade auctions favoring the production of a combination of AMF/SMP over WMP. The AMF price has fallen since mid-March which suggests that WMP will be favored over AMF/SMP, but industry views differ on how the relative pricing will drive production decisions. Skim Milk Powder MY2010 SMP production is estimated at 344,000 tons, a downward revision of 3%. This is a consequence of the decline in butter/AMF production. (In most manufacturing situations, SMP is a co-product of butter or AMF production.) MY2011 In line with flat butter/AMF production forecasts, SMP production is revised downward by 6.3% to 375,000 tons. Cheese MY2010 Based on export data and industry reports, cheese production is down and is likely to continue trending downward. Reflecting this, the production estimate has been revised downward by 11.6% to 268,000 tons. MY2011 Production is forecast to continue falling to 255,000 tons in MY2011. The forecast reflects the expectation that production decisions will favor WMP production and a tendency to use cheese plants to ?mop up? peak milk flows from October to December. Cheddar for further processing makes up 67% to 73% of total cheese production. According to trade contacts, demand for this product is weak, particularly from South East Asia. Processors According to reports by KMPG, Westland Milk Products has announced plans to build a milk- concentrate plant at Rolleston, establishing a foothold in the Canterbury region of the South Island. Westland is already transporting milk from Canterbury to the West Coast as they are purchasing 50 million liters of DIRA milk from Fonterra. The plans include building a milk concentrator at the cooperative?s new Rolleston storage facility by 2012 and constructing a NZ $100 million value-added product factory in 2013. Westland?s entry share price for new farmers is reportedly close to NZ $1.50 per kilogram of milk solids, much lower than Fonterra?s NZ $4.60. This could entice some of Canterbury?s dairy farmers to shift supply to Westland. Fonterra will reportedly be building a new milk processing dryer in Southland by the end of the decade as its Edendale plant is forecast to reach capacity next season. The plant now has a capacity of 15.1 million liters a day, the biggest processing capacity of any site in the world. Fonterra reportedly also has plans to build another drier/processing plant in mid-Canterbury. New Zealand: Overview of Dairy Processors (other than Fonterra) Forecast Forecast Milk Estimated Total Milk Accessed Milk Processed under DIRA Processed Company Date Company 2010/11 2010/11 2012/13 Name Established Type Season 1/ Season Season Product Focus Millions of kilograms of milk solids North Island Tatua 1919 Cooperative 16 AMF, .5 4.3 17.5 Caseinates, Specialty Products Goodman Yogurt and Fluid Corporate 24 24 24 Fielder Milk Open Cheese, Whey Country 2007 Corporate 55 4.3 58 (low protein), Dairy WMP, SMP, AMF NZ Dairy Processing 2010 Corporate 3 3 5 Ltd UHT liquid milk M struction irak cona M nearing Corp/Iwi 0 0 17 ilk completion WMP/SMP AMF A Planning Capital rapuni M Raising, Corporate 0 0 17 ilk Coy Consents granted WMP Corporate Da in planning integrated iryland stages farming & 0 0 0 processing WMP/SMP AMF Estimated N.I. 98.5 35.6 138.5 South Island Westland M Milk Powder, ilk 1937 Butter, AMF, Cooperative 52 4.3 54 Products Caseins, Caseinates etc. Open Whey (low Country 2007 Corporate 23 0 42 protein), WMP, Dairy SMP, AMF NZ Dairies 2007 and Child Corporate 18 3 18 WMP Nutrition Products WMP, AMF, SMP, Synlait 2008 Corporate 25 4.3 40 Enfant formula & Nutritional Products Cadbury Corporate 2.2 2.2 2.2 Confectionary Mataura In process of V Corporate 0 0 0 alley Milk raising capital WMP Oceania site purchased by M Corporate 0 0 0 ilk Synlait WMP Estimated 120.2 13.8 156.2 S.I. Other Small arious, artisan 3 3 3 V Processors cheeses etc Total NZ 221.7 52.4 297.7 Sources: Post, Fonterra, Westland, Tatua, MAF PSD Tables Dairy, Milk, 2009 2010 2011 Fluid New Zea Market Year Begin: Jan 2009 Market Year Begin: Jan 2010 Market Year Begin: Jan 2010 land 1,000 He New ad Official Post P New New ost 1 P Official ost P Official Post ost ,000 MT Data Estimate D Data Estimate ata D Da Post ta Estimate ata Data Cows In Milk 4597 4597 4597 4753 4753 4700 4850 4850 4800 Cows Milk 17397 17397 16983 16897 16897 17173 18642 18642 18049 POrtohdeuction r Milk 0 0 0 0 0 0 0 0 0 Production Total Production 17397 17397 16983 16897 16897 17173 18642 18642 18049 Other Imports 2 2 2 2 2 2 2 2 2 Total Imports 2 2 2 2 2 2 2 2 Total Supply 17399 17399 16985 16899 16899 17175 18644 18644 18051 Other Exports 98 98 98 127 127 123 130 130 125 Total Exports 98 98 98 127 127 123 130 130 125 Fluid Use Dom 331 331 300 340 340 300 340 340 300 Cons Factory Use Cons 16925 16925 16537 16387 16387 16702 18129 18129 17576 Feed Use Dom 45 45 50 45 45 50 45 45 50 CTootnasl Dom 17301 17301 16887 16772 16772 17052 18514 18514 17926 Consumption Total Distribution 17399 17399 16985 16899 16899 17175 18644 18644 18051 CY Imp. from U.S. 0 0 0 0 0 0 0 0 0 CY. Exp. to U.S. 0 0 0 0 0 0 0 0 0 TS=TD 0 0 0 0 0 0 Dairy, Dry 2 0 0 9 2010 2011 Whole Milk Powder New Market Year Begin: Jan 2009 Market Year Begin: Jan 2010 Market Year Begin: Jan 2011 Zealand New New New (1000 MT) Official Post Post Official Post Post Official Post Post Data Estimate Data Data Estimate Data Data Estimate Data Beginning Sto 70 150 150 20 100 100 10 60 100 cks Production 768 768 768 850 830 947 900 900 1015 Other Imports 1 1 1 1 1 2 1 1 1 Total Imports 1 1 1 1 1 2 1 1 1 Total Supply 839 919 919 871 931 1049 911 961 1116 Other Exports 818 818 818 860 870 948 885 885 990 Total Exports 818 818 818 860 870 948 885 885 990 Human Dom. Con 1 1 1 1 1 1 1 1 1 s. Other Use, 0 0 0 0 0 0 0 Losses Total Dom. Con 1 1 1 1 1 1 1 1 1 s. Total Use 819 819 819 861 871 949 886 886 991 Ending Stocks 20 100 100 10 60 100 25 75 125 Total Di 839 919 919 871 931 1049 911 961 1116 stribution CY Imp. from U.S. 0 0 0 0 0 0 0 CY. Exp. to U.S. 3 3 3 1 1 0 1 1 1 TS=TD 0 0 0 0 0 0 Dairy, M 2009 2010 2011 ilk, Nonfat Dry New Market Year Begin: Jan Market Year Begin: Jan Market Year Begin: Jan Zealand 2009 2010 2011 New New New (1000 MT) Official Post Post Official Post Post Official Post Post Data Estimate Data Data Estimate Data Data Estimate Data Beginning Sto 34 70 70 14 50 50 14 50 50 cks Production 385 385 385 355 355 344 400 400 375 Other Imports 4 4 4 2 2 3 2 2 3 Total Imports 4 4 4 2 2 3 2 2 3 Total Supply 423 459 459 371 407 397 416 452 428 Other Exports 408 408 408 355 355 344 400 400 375 Total Exports 408 408 408 355 355 344 400 400 375 Human Dom. Con 1 1 1 2 2 3 2 2 3 s. Other Use, 0 0 0 0 0 0 0 Losses Total Dom. Con 1 1 1 2 2 3 2 2 3 s. Total Use 409 409 409 357 357 347 402 402 378 Ending Stocks 14 50 50 14 50 50 14 50 50 Total Di 423 459 459 371 407 397 416 452 428 stribution CY Imp. from U.S. 0 0 0 0 0 0 0 0 0 CY. Exp. to U.S. 0 0 0 0 0 0 0 0 0 TS=TD 0 0 0 0 0 Dairy, 2009 2010 2011 Butter New Market Year Begin: Jan Market Year Begin: Jan Market Year Begin: Jan Zea 2009 2010 2010 land New New New (1000 MT) Official Post Post Official Post Post Official Post Post Data Estimate Data Data Estimate Data Data Estimate Data Beginning Stocks 70 80 80 46 56 56 30 40 50 Production 482 482 482 453 453 441 500 500 454 Other Imports 1 1 1 1 1 1 1 1 1 Total Imports 1 1 1 1 1 1 1 1 1 Total Supply 553 563 563 500 510 498 531 541 505 Other Exports 489 489 489 450 450 428 461 461 435 Total Exports 489 489 489 450 450 428 461 461 435 Domestic Cons. 18 18 18 20 20 20 20 20 20 Total Use 507 507 507 470 470 448 481 481 455 Ending Stocks 46 56 56 30 40 50 50 60 50 Total Distribution 553 563 563 500 510 498 531 541 505 CY Imp. from U.S. 0 0 0 0 0 0 0 CY. Exp. to U.S. 37 37 37 35 35 22 35 35 25 TS=TD 0 0 0 0 0 0 0 0 0 Note 1: Non butter fat products such as AMF are brought up to a butter equivalency by multiplying by 1.22. Dairy, 2009 2010 2011 Cheese New Market Year Begin: Jan 2009 Market Year Begin: Jan 2010 Market Year Begin: Jan 2011 Zealand New New New (1000 MT) Official Post Post Official Post Post Official Post Post Data Estimate Data Data Estimate Data Data Estimate Data Beginning Stocks 41 55 55 41 55 55 41 55 40 Production 308 308 308 303 303 268 313 313 255 Other Imports 6 6 6 6 6 6 6 6 6 Total Imports 6 6 6 6 6 6 6 6 6 Total Supply 355 369 369 350 364 329 360 374 301 Other Exports 290 290 290 285 285 265 295 295 237 Total Exports 290 290 290 285 285 265 295 295 237 Human Dom. C 24 24 24 24 24 24 24 24 24 ons. Other Use, 0 0 0 0 0 0 0 0 0 Losses Total Dom. Cons. 24 24 24 24 24 24 24 24 24 Total Use 314 314 314 309 309 289 319 319 261 Ending Stocks 41 55 55 41 55 40 41 55 40 Total Distribution 355 369 369 350 364 329 360 374 301 CY Imp. from U 0 0 0 0 0 0 0 0 .S 0 . CY. Exp. to U.S. 17 17 17 7 7 5 0 10 7 TS=TD 0 0 0 0 0 0 0 Note 2: these tables are not official USD forecasts. Consumption The 2010 milk consumption estimate has been revised downward by 11% to 300,000 tons and is forecast to remain at this level in 2011. The downward revision is largely due to a drop in demand stemming from domestic price increases. According to Statistics New Zealand, food prices as of March 2011 were up 5.5% compared to a year earlier. Fresh milk prices were up 9.3%, beef prices 8.2%, and lamb prices 16.4%. During March 2011, the price of fresh milk fell slightly, down 0.2%, possibly as a result of an announcement by supermarket chains in February that prices would not increase for the rest of the year. The announcement followed Fonterra?s decision to freeze its wholesale domestic milk price to distributors and retailers. Fonterra?s profit margin on a two-liter bottle of milk is reportedly 12%. The two large supermarket changes, Foodstuffs and Progressive Enterprises, have not revealed their profit margins. The rise in milk prices has sparked public concern and the Commerce Commission is investigating whether a full milk price inquiry is needed. At a recent commerce select committee meeting in Parliament, Consumer NZ alleged that the current regulatory regime has failed to ensure contestability in the raw milk market. The consumer organization supports a call for an independent milk price regulator. Fonterra is strongly opposed to the notion of introducing an independent price regulator, saying it would jeopardize New Zealand?s reputation with trading partners and reverse its free market trading policy. Trade Exports Total 2010 exports fell slightly (1.5%) to 2.3 million tons. (Although 2009 exports were boosted by stock levels held over from 2008.) Exports in 2011 are forecast to hit a record high in the region of 2.35 million to 2.4 million tons depending on ending stock levels and spring pasture growth. According to press reports, Fonterra hit an all time record during the month of March 2011 with exports reaching 229,000 tons. Recent warm weather coupled with demand from China, South East Asia and the Middle East has driven the record result. (Note: liquid products adjusted to product weight equivalent, but AMF not adjusted as per PSD tables.) Source: Global Trade Atlas (GTA) Whole Milk Powder (WMP) MY2010 WMP exports in MY 2010 were 9% higher than forecasted reaching 948,000 tons. This is a 16% increase from MY 2009. MY2011 WMP exports are forecast to increase further to 990,000 tons, which is 11.9% higher than previously forecasted. Industry contacts suggest that, given the supply and demand situation, WMP exports will increase at the expense of cheese exports. During the first two months of CY 2011, WMP exports were already 55,000 tons ahead of the previous year. Source: Global Trade Atlas (GTA), Post Butter and Other Fats MY2010 Actual butter (AMF is adjusted to a butter equivalent) exports were 428,000 tons, down 4.9% from the previous forecast. MY2011 Butter exports are forecast to increase to 435,000 tons but will be down on previous forecast by 5.6%. Although there are some indications that relative pricing still favors production of AMF/SMP, there are other factors that suggestion additional milk supply will go toward the production of WMP. Skim Milk Powder MY2010 SMP exports were 344,000 tons, 11,000 tons or 3% less than the previous estimate. MY2011 SMP exports are forecast to increase in MY2011 to 375,000 tons. However, this is a 6.25% downward revision compared to the initial forecast. Cheese MY2010 Cheese exports fell to 265,000 tons, which is 7% down from the previous estimate. According to industry contracts, prevailing prices don?t warrant additional production, especially for ingredient grade cheddar which makes up 67% to 73% of total cheese exports. MY2011 Exports are forecast to fall further to 237,000 tons. This is a 19.7% less than the original forecast and largely due to relative pricing of commodities. United States New Zealand exported just over 96,000 tons of dairy products to the United States in 2010, valued at US $515 million, which is 5% less than the previous year and well below the peak of US $706 million in 2008. Total tonnage was down 37,000 tons when compared to 2009. Major exports to the US market include: milk protein concentrates, butter and fat products, and casein. Cheese exports dropped to 5,291 tons, down from 17,465 tons in 2009 and a peak of 47,253 tons in 2002. The predominant type of cheese exported by New Zealand is bulk cheddar for further processing. The relative profitability for this product has trended downward over the last few years. Source: GTA Source: GTA New Zealand: Dairy Products to Top Five Markets (CY2010/metric tons) China USA Japan Australia Philippines World Total Liquid Milk (T) 8,168 120 0 11,085 39,463 123,446 SMP 50,790 203 4,851 5,345 41,904 343,371 WMP 294,181 328 0 7,492 22,332 948,473 Consumer Products 2,987 60 4,082 3,370 12,355 49,710 MPC 1,383 43,654 2,866 1,490 1,449 73,279 Butter & Fats 19,351 18,502 731 16,587 14,945 395,338 Cheese 11,702 5,291 53,346 54,290 10,866 264,819 Casein 4,872 22,999 10,045 768 819 61,593 Whey Products 7,806 5,179 4,887 2,583 130 27,890 Other Products incl Lactose 328 103 4,147 1,460 460 18,896 Total Volume 401,568 96,439 84,955 104,470 144,723 2,306,815 Total Value in 1000's USD $1,386,864 $514,623 $404,798 $396,888 $389,398 $8,144,846 Price per Metric Ton in USD $3,454 $5,336 $4,765 $3,799 $2,691 $3,531 Source: GTA Global Dairy Trade ? the Fonterra Commodity Auction Platform In 2010, 544,150 tons of products were sold through Global Dairy Trade (gDT), which equates to 23.6% of total exports. This compares to 228,700 tons in 2009, which accounted for 9.8% of exports. WMP, SMP, and AMF make up the bulk of commodities sold on the platform but butter milk powder and industrial butter are also being sold. As of May 2011, milk protein concentrate and rennet casein will be offered. Industrial cheddar cheese will be added in July 2011. Fonterra has publically stated that it would like other vendors to join the platform. In March 2011, Fonterra published draft rules that would govern the opening of the online auction to other companies. The rules were reportedly developed with input from other global dairy firms including Arla Foods, FrieslandCampina, DairyAmerica and Australia's Murray Goulburn. According to media reports, California Dairies Inc. (CDI) is expected to start selling SMP on the gDT platform perhaps later in 2011 or early in 2012. CDI is second largest dairy co-operative in the US and the largest supplier of milk powder to DairyAmerica. Source: Global Dairy Trade Source: Global Dairy Trade Policy Third Stage of Fonterra Capital Restructuring - Trading Among Farmers (TAF) In order for Fonterra to implement the final phase of its capital restructuring plan, the New Zealand Government must make legislative changes to the Dairy Industry Restructuring Act (DIRA). The revision to DIRA would enable Fonterra to implement a scheme known as ?Trade Amongst Farmers? (TAF). Fonterra needs permanent capital to pursue its overseas growth ambitions and wants to rid itself of the statutory obligation to redeem shares when farmers exit the cooperative or reduce milk supply. TAF would require farmers exiting the cooperative to find buyers for their shares rather than relying on Fonterra to redeem them. There was overwhelming support among Fonterra shareholders for TAF, with the 79% of those who voted being 90% in favor. However, Fonterra competitors have expressed concern that introduction of share trading will lock farmers into Fonterra, thereby diminishing market competition for farmers? milk. While it was initially expected that TAF could be in place by November 2011, some speculate that election year hurdles - a Commerce Commission investigation into the retail price of milk, reported uneasiness in the investment community about some aspects of the proposal, and a tight legislative timetable ? could through up roadblocks delaying the implementation of TAF till sometime in 2012. According to press reports, Agriculture Minister David Carter has all but ruled out Fonterra?s chances of getting legislation changed prior to the November election, and there could be further delays if the Commerce Commission decides to go ahead with an inquiry into milk pricing. Such an inquiry could also affect the timing of a current government review of the 2001 raw milk regulations which require Fonterra to sell a fixed quantity of raw milk annually to its competitors. The Ministry of Agriculture and Forestry (MAF) published a discussion document in February 2011 on Fonterra?s proposal. (Click on the following link to read the document: http://www.maf.govt.nz/news- resources/consultations/dairy-industry-restrucuring-act-proposals-to-permi.aspx) The document attracted 23 public submissions, of which, seven fully supported TAF; seven supported the idea and goals behind TAF but had reservations regarding the means by which Fonterra was going about achieving its goals and how that would affect other industry stakeholders; and nine were opposed to the proposal. Key concerns included the potential for insufficient liquidity in the TAF market and milk price setting. Several respondents requested full disclosure regarding how the milk price is calculated. Commerce Commission Considers Milk Price Inquiry Rising retail milk prices have led the industry and public to call for an independent regulator of domestic milk prices. The New Zealand Commerce Commission has announced that it will conduct a preliminary investigation into the domestic milk market to determine if a full price inquiry is warranted. Its report is expected within the next few months. Dairy Industry Restructuring Act (DIRA) ? Bill to Extend Sunset Clauses The competition policy measures in DIRA are subject to sunset clauses based on the proportion of milk collected by independent processors. According to MAF, some of these triggers could be met as early as 2012. The phase-out of these triggers spells the end of Fonterra?s obligation to supply raw milk at regulated prices. The rationale behind the raw milk regulations is to protect consumers from monopoly pricing and to provide an entrance pathway for new processors (by helping to ensure access to an adequate milk supply). A bill was introduced into parliament that keeps the raw milk regulations in place until Fonterra?s share of milk production falls to 80% (revised downward from 87.5%) at which time an additional review will be completed. Free Trade Agreements The following agreements are in force: New Zealand-Hong Kong, China Closer Economic Partnership (NZ-HK CEP entered into force on 1 January 2011) New Zealand-Malaysia Free Trade Agreement (MNZFTA entered into force on 1 August 2010) ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) - 2010 New Zealand-China Free Trade Agreement (NZ-China FTA) - 2008 Trans-Pacific Strategic Economic Partnership (P4) - 2005 New Zealand-Thailand Closer Economic Partnership (NZTCEP) - 2005 New Zealand-Singapore Closer Economic Partnership (NZSCEP) - 2001 Australia-New Zealand Closer Economic Relationship (CER) - 1983 In addition, the New Zealand Government is currently negotiating the following FTAs: New Zealand-Gulf Cooperation Council Free Trade Agreement (NZ-GCC FTA negotiations have been concluded but not yet signed) Expansion of the Trans-Pacific Strategic Economic Partnership (TPP) New Zealand-Korea Free Trade Agreement (NZ-Korea FTA) New Zealand-India Free Trade Agreement (NZ-India FTA) New Zealand-Russia-Belarus-Kazakhstan Free Trade Agreement (NZ-RBK) While exporters report that FTAs do not drive business decisions, they do provide a framework to work out trade-related issues, especially SPS and non-tariff barriers, and, in some cases, convey significant market access advantages. For instance, in the New Zealand -China FTA, tariffs on milk powder will be reduced from 10% to 3.3% by 2015. By 2015, the tariff savings will be US $268/ton, which, at current WMP prices of US $4,000/ton, equates to 7%. Sustainability Developments ? Clean Streams Accord The Dairying and Clean Streams Accord remains a key environmental initiative alongside many other projects and strategies that support and improve the dairy industry?s social, economic and environmental performance. The Dairying and Clean Streams Accord is an agreement between the Ministry of Agriculture and Forestry (MAF), Ministry for the Environment, Fonterra and Local Government New Zealand (on behalf of regional councils). Signed in May 2003, the Accord provides a framework for these organizations to work together on environmental matters. Farmers who don?t supply Fonterra are not part of the accord. Regional Dairy Effluent Compliance Results for the 2007/08?2009/10 Seasons Total Total Significant non- Fonterr Farms Full compliance % Non-compliance % compliance (%) a Farms Assesse 200 200 201 200 200 201 200 200 201 d Regional council 8 9 0 8 9 0 8 9 0 2010 2010 Northland 43 39 43 31 34 33 26 27 24 927 947 Auckland 73 45 62 19 32 32 7 23 6 317 310 Waikato 48 41 52 42 39 21 10 20 27 3749 686 Bay of Plenty 76 73 79 15 18 11 9 9 10 650 364 Taranaki 96 96 96 4 3 3 0.2 0.5 1 1687 1782 Hawke?s Bay 74 83 62 16 13 33 11 5 4 85 78 Horizons 78 77 81 0 9 4 22 14 15 830 384 Wellington 53 72 89 19 24 9 28 4 1 180 177 Tasman 93 89 73 5 6 19 2 5 8 138 37 Marlborough 75 88 57 25 10 38 0 2 5 61 60 Canterbury 46 43 59 34 37 33 20 19 8 803 769 Otago 83 75 95 10 20 4 8 5 2 342 389 Southland 65 69 39 22 18 48 13 13 13 758 768 Weighted Average(a) 64 60 65 25 26 20 12 15 16 10527 6751 Source: MAF,Fonterra Land and Water Forum In June 2009, the New Zealand Government announced a new water management program called the New Start for Fresh Water Program. The program is expected to establish a fairer and more efficient water management system. The Land and Water Forum is one of the initiatives under the program. The Forum released a report in September 2010 that sets out a framework for moving water management forward, which would potentially be beneficial to the dairy sector and support further expansion. Report of the Land and Water Forum: A Fresh Start for Fresh Water; www.landandwater.org.nz
Posted: 15 June 2011, last updated 15 June 2011

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