Dairy and Products Annual Report 2012

An Expert's View about Food , Beverages and Tobacco in New Zealand

Posted on: 10 Nov 2012

NZ milk production is expected to decline modestly in 2013 and is forecast at 20.2 MMT.

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: 10/15/2012 GAIN Report Number: NZ1213 New Zealand Dairy and Products Annual Report 2012 Milk Production and Dairy Product Exporting in New Zealand Approved By: Joseph Carroll, Agricultural Counselor Prepared By: David Lee-Jones, Agricultural Specialist Report Highlights: NZ milk production is expected to decline modestly in 2013 and is forecast at 20.2 MMT. Whole milk powder remains the product of choice for NZ dairy processors, with production expected to remain stable in 2013 at 1.25 MMT, while exports are projected to increase to 1.275 MMT. Fonterra, NZ’s largest dairy processor and exporter, is effecting major changes to its constitution. Executive Summary: Excellent pasture growing conditions that have supported impressive gains in dairy production over the past 18 months are not expected to carry on indefinitely. Assuming a more normal weather pattern and stable cow numbers, NZ milk production in 2013 is forecast at 20.20 million metric tons (MMT), slightly lower (nearly 1%) than last year’s estimated production level of 20.35 MMT. 2012 production was 7% higher than in 2011, which in turn was 10% higher than in 2010. Taking into account that cow numbers have only risen by about 7% over the two-year period (2011- 2012), the production increases are a testament to the considerable genetic potential of the national herd that was just waiting to be expressed under the right environmental conditions. Whole milk powder is expected to remain the product of choice for NZ dairy processors. Although milk supply is expected to decline (marginally) in 2013, WMP production is forecast at 1.25 MMT, the same as the estimated 2012 production level, which is about 10% higher than in 2011. In 2012, production capacity has been expanded by the addition of a new 15 MT/hr powder drier (75- 100,000 MT/year); this will be followed in 2013 by the addition of a 30 MT/hr drier (up to 200,000 MT/year). In response to a smaller milk supply, production of cheese, butter/anhydrous milkfat, and skim milk powder are all expected to decline slightly in 2013. In 2012, cheese production is expected to be up 14.8% year-on-year and is estimated at 310,000 MT; butter/AMF up 5.7% at 499,000 MT; followed by SMP up 6.6% at 390,000 MT. Basically all the result of the big increase in milk supply during 2012. Over 95% of New Zealand’s dairy production is exported in one form or another, thus as production increases so too do exports. Inventories are forecast to be up approximately 20% at the end of 2012, moderating the between year changes in export shipments. For 2013 total PSD commodity exports are forecast at 2.53 MMT a 3.5% increase on the 2012 estimated export level of 2.45 MMT, which in turn is about 6.6% ahead of 2011 exports. WMP is consistently the standout performer growing from an estimated export level of 1.218 MMT in 2012 to a forecast of 1.275 MMT in 2013. Cheese is enjoying somewhat of a reprieve at the moment and is expected to buck a trend of reduced exports since 2006 and come in with exports of around 275,000 MT for both 2013 and 2012. On the regulatory front, Fonterra, which processes approximately 89% of the milk produced in New Zealand, is expected to implement “Trading Among Farmers” (TAF) by the end of 2012. TAF, a huge constitutional shift, is designed to substantially remove redemption risk from the Cooperatives balance sheet. The proposed changes have not been without controversy. Data included in this report is not official USDA data. Official USDA data is available at: http://www.fas.usda.gov/psd Commodities: Dairy, Butter Dairy, Cheese Dairy, Dry Whole Milk Powder Dairy, Milk, Fluid Dairy, Milk, Nonfat Dry Milk Production Dairy, Milk, 2011 2012 2013 Fluid Market Year Begin: Market Year Begin: Market Year Begin: Jan 2011 Jan 2012 Jan 2013 New Zealand Officia New New New l Post Official ficial Post Of Post Cows In Milk 4810 4816 4890 5021 5021 Cows Milk Production 18965 18965 19874 20348 20196 Other Milk Production 0 0 0 0 0 Total Production 18965 18965 19874 20348 20196 Other Imports 2 2 2 1 1 Total Imports 2 2 2 1 1 Total Supply 18967 18967 19876 20349 20197 Other Exports 123 123 125 100 120 Total Exports 123 123 125 100 120 Fluid Use Dom. Consumed. 300 300 300 300 300 Factory Use Consumed. 18494 18494 19401 19899 19727 Feed Use Dom. Consumed. 50 50 50 50 50 Total Dom. Consumption 18844 18844 19751 20249 20077 Total Distribution 18967 18967 19876 20349 20197 CY Imp. from U.S. 0 0 0 0 0 CY. Exp. to U.S. 0 0 0 0 0 TS=TD 0 0 0 (1000 Hd, 1000MT) Not Official USDA data 2013 The run of excellent weather conditions has to come to an end at some point and with it the extraordinary production increases. Assuming more normal weather conditions in the coming year, total milk production is expected to decline marginally (almost 1%) in 2013 and is forecast at 20.2 million metric tons (MMT). The factors underpinning the 2013 forecast are: Neither El Nino nor La Nina weather patterns are predicted at present, which should lead to relatively normal pasture growth over the first half of 2013. Given these conditions, North Island milk supply is expected to decline significantly in the first half of 2013. While cow numbers will likely remain stable, the cows are not likely to benefit from the same quality or quantity of forage as was available in the first half of 2012, thereby reducing the per head performance. To some extent, the decline in North Island production will be offset by continuing production increases in the South Island as new dairy farm conversions begin to contribute more significantly to the overall milk supply. Additionally, weather variability in the Southern Island is mitigated to a large degree by the ability of many farmers to irrigate. A lower milk price outlook will tend to put a dampener on farmers purchasing supplementary feed to boost production unless they can see a clear financial margin. Source: DairyNZ, Post, StatisticsNZ, 2012 Excellent pasture conditions in 2012 have supported strong growth in milk output; consequently, the estimate for 2012 milk production was revised upward to 20.35 MMT, 7.3% ahead of estimated 2011 production level. This is an incredible result, as it comes on the heels of a 10% increase in 2011 compared to 2010. Considering cow numbers have only risen approximately 7% over the two year period, the result is testament to the considerable genetic potential of the NZ dairy herd that was just waiting for the right environmental conditions to be expressed. More specifically, the following factors have also contributed to the 2012 result: Cow numbers increased by 205,000 head during 2012 (up 4.3%). This was due in part to an estimated additional 125 dairy farm conversions contributing around 100,000 cows and an unexpected increase in existing farm cow numbers of 120,000 head. Improved nutrition in 2011 allowed for a greater number of cows to get in calf and be kept on farm through 2012. Improved nutrition for a sustained duration has meant cows were maintained in better condition and calved down in August/September 2012 better than normal, thereby setting the scene for higher production. During the first half of 2012 farmers were operating under a forecast milk price that was relatively high providing them the confidence to purchase or accumulate supplements to increase production. Even though the milk price outlook for the 2nd half of 2012 has dampened, farmers have carried adequate supplies of supplementary feed into the period and at this stage don’t need to purchase higher than normal amounts of feed. Source: DairyNZ, Post, StatisticsNZ Source: Global Dairy Trade website & Post data Dairy Product Manufacture Whole Milk Powder (WMP) Dairy, Dry 2 0 1 1 2012 2013 Whole Milk Market Year Begin: Jun Market Year Begin: Jun Market Year Begin: Jun Powder 2011 2012 2013 New Zealand Official New Post Official New Post Official New Post Beginning Stocks 100 100 115 130 161 Production 1,125 1,141 1,217 1,250 1,250 Other Imports 1 1 1 1 1 Total Imports 1 1 1 1 1 Total Supply 1,226 1,242 1,333 1,381 1,412 Other Exports 1,110 1,110 1,200 1,218 1,275 Total Exports 1,110 1,110 1,200 1,218 1,275 Human Dom. Cons. 1 2 1 2 2 Other Use, Losses 0 0 0 0 Total Dom. Cons. 1 2 1 2 2 Total Use 1,111 1,112 1,201 1,220 1,277 Ending Stocks 115 130 132 161 135 Total Distribution 1,226 1,242 1,333 1,381 1,412 CY Imp. from U.S. 0 0 0 0 0 CY. Exp. to U.S. 1 2 0 2 2 TS=TD 0 0 0 (1000 MT) Not Official USDA data 2013 WMP is expected to remain the product of choice for NZ dairy product manufacturers. Forecast at 1.25 MMT, production in 2013 is forecast to be equivalent to the estimated 2012 production level. However, most other product formats are likely to be slightly reduced in volume terms in line with the slight decrease in milk supply. Fonterra is set to commission a new drier in the South Island in 2013, which will be largest capacity drier in the world capable of producing up to an estimated 200,000 MT of powder a year. While this capacity is unlikely to immediately change the relative tonnages of different product formats, it will give the flexibility to produce the most profitable formats from more of the milk supply. For example it will enable other processing capacity to be switched to nutritional powder production that can be significantly more profitable. Nutritional powders are the main ingredient for infant formula and geriatric nutritional products. 2012 A big jump in WMP production is expected in 2012, which estimated at 1.25 MMT, a 9.6% year-on- year gain. The main factors leading to this boost include: Increased milk supply in 2012 Additional processing capacity built over the last 10 years has been directed to powder driers that are either dedicated WMP driers or multi-format WMP and SMP/AMF set ups. In August 2012 a new 15 MT/hour drier was commissioned in the South Island which has an annual production capacity of somewhere on the order of 75,000 to 100,000 MT. WMP is typically cheaper to produce than any other format (apart from liquid milk). The value of a ton of milk made into WMP maintains its similarity to or advantage over the pricing for the other main commodity formats (see GDT chart above). Year to date (August 2012), export statistics show WMP shipments are up approximately 18% which would support estimates that production is up significantly. Butter and Anhydrous Milk Fat (AMF) Products 2011 2012 2013 Dairy, Butter New Market Year Begin: Market Year Begin: Market Year Begin: Zealand Jan 2011 Jan 2012 Jan 2013 (1000 MT) USDA USDA USDA Official New Post Official New Post Official New Post Beginning Stocks 50 50 45 55 54 Production 459 472 495 499 490 Other Imports 1 1 1 1 1 Total Imports 1 1 1 1 1 Total Supply 510 523 541 555 545 Other Exports 448 448 470 480 474 Total Exports 448 448 470 480 474 Domestic Cons. 17 20 20 21 21 Total Use 465 468 490 501 495 Ending Stocks 45 55 51 54 50 Total Distribution 510 523 541 555 545 CY Imp. from U.S. 0 0 0 0 0 CY. Exp. to U.S. 22 22 17 28 28 TS=TD 0 0 0 Not Official USDA data Note: Anhydrous Milk Fat (AMF) is adjusted in the tables and in the narrative to butter equivalents by multiplying AMF tons by 1.22. 2013 Butter/AMF production in 2013 is forecast at 490,000 MT, slightly lower (1.8%) than the estimated 2012 production level. The trade reports some uneasiness with regard to fat demand and relative pricing among dairy products at the moment. Combining this sentiment with the likelihood of a lower milk supply in 2013 and processors continued emphasis on the production of WMP; it is unlikely that there will be a production increase in Butter/AMF 2013. However, this line of thinking could be reversed depending on how far the current downturn in milk production in the U.S. deepens and how production in the EU trends over the first half of 2013. If supplies of fat tighten up much more, there will be a price bounce which would make the manufacturing of AMF and SMP more profitable than WMP and encourage a production switch. In addition, fat prices can often be pulled along by cheese pricing. So a shortening of northern hemisphere milk supply would be positive on two fronts for fat production in NZ. 2012 With milk supply up significantly, fat production is expected to follow suit and record a 5.7% year- on-year increase to reach an estimated 499,000 MT in 2012. This estimate is supported by: Year-to-date (Aug) exports are reported to be 44,000 MT higher than during the same period in the previous year. At present some members of the trade are saying that AMF and SMP production is more profitable than WMP. Processors find it difficult to keep pace with the increase in milk supplies during the peak annual flow period (October to December), and it is generally quicker for them to process milk into AMF and SMP utilizing two processing lines, than to produce WMP. With this year’s increased supply of milk, processors will no doubt be stretched to the max, which would support a forecast that fat production in Q4, 2012 will be similar to 2011. Skim Milk Powder/Non-Fat Dried Milk 2013 Production of SMP/NFDM in 2013 is forecast at 380,000 MT, 2.6 percent lower than the estimated 2012 production level. The following factors indicate this is the most likely scenario: Milk supply is likely to decrease slightly, so any increase in SMP production means there would need to be a corresponding decrease in WMP or Milk Protein Concentrate (MPC’s are basically concentrated SMP with the lactose removed). This is not envisaged. Relative prices for a ton of milk made into SMP and AMF versus WMP are evenly poised at the moment (see GDT Auction pricing chart above), which would suggest that the current manufacturing split between the formats is likely to be maintained into 2013. 2012 Combining the effect of greater milk supply and the likelihood of increased fat production means SMP (the protein component of milk used for fat production) will most likely increase in 2012. Total production in 2012 is estimated at 390,000 MT, a 6.6% improvement over 2011. The following factors also have a role to play in determining production levels. Reiterating the factor from the fat discussion: at the peak spring milk flush when plants are running at full capacity it is often quicker to make SMP and AMF utilizing two production lines, but the process is generally slightly more expensive. While the South Island has additional drier capacity for the 2nd half of 2012, peak milk flows in the North Island could easily surpass 2012 levels necessitating greater SMP and AMF manufacturing just to process all the milk in a timely manner. SMP production is heavily dependent on the outlook for fat demand and pricing, being the co-product of the same production process. Some protein from the fat/protein separation process goes to Milk Protein Concentrates; Casein/Caseinates and Whey Proteins. However the markets for these products while valuable are finite. Nevertheless production of these products in 2012 is likely to be up 4- 6% limiting the total increase of SMP production. Dairy, Milk, Nonfat D 2011 2012 2013 ry New t Year Begin: Jan Market Year Begin: Jan Market Year Begin: Jan Zealand Marke 2011 2012 2013 (1000 MT) USDA Official New Post USDA Official New Post USDA Official New Post Beginning Stocks 50 50 47 53 70 Production 360 366 380 390 380 Other Imports 2 2 2 5 4 Total Imports 2 2 2 5 4 Total Supply 412 418 429 448 454 Other Exports 362 362 365 375 390 Total Exports 362 362 365 375 390 Human Dom. Cons. 3 3 3 3 4 Other Use, Losses 0 0 0 0 0 Total Dom. Cons. 3 3 3 3 4 Total Use 365 365 368 378 394 Ending Stocks 47 53 61 70 60 Total Distribution 412 418 429 448 454 CY Imp. from U.S. 0 0 CY. Exp. to U.S. 0 1 0 1 1 TS=TD 0 0 0 Not Official USDA data Cheese Production 2013 With a projected slight decline in the milk supply it is hard to see cheese production maintaining the production levels achieved in 2012. Consequently, it is expected that production will decline in 2013, to a forecast level of 290,000 MT, a year-on-year decrease of nearly 6.5%. The level of cheese production is typically determined by: Generally, cheese plants are only run during the peak milk supply months. With additional powder capacity coming on line during 2013 and a peak milk flow likely to be similar to 2012 the pressure to produce extra cheese just to process all the milk won’t be as great in 2013. Higher manufacturing costs in NZ means cheese prices need to be relatively higher than WMP or SMP/AMF before there would be a discretionary choice to produce cheese. Whey product (the co-product of cheese manufacture) prices can determine the economics of a cheese plant. At present they are running at a high level and this is expected to be maintained. Dairy, Cheese 2011 2012 2013 New Zealand M a r k e t Y e a r B egin: Jan Market Year Begin: Jan Market Year Begin: Jan 2011 2012 2013 New USDA New (1000 USDA New USDA MT) Official Post Official Post Official Post Beginning Stocks 40 40 22 32 42 Production 250 270 275 310 290 Other Imports 5 5 5 5 5 Total Imports 5 5 5 5 5 Total Supply 295 315 302 347 337 Other Exports 253 253 260 275 275 Total Exports 253 253 260 275 275 Human Dom. Cons. 20 30 20 30 30 Other Use, Losses 0 0 0 0 0 Total Dom. Cons. 20 30 20 30 30 Total Use 273 283 280 305 305 Ending Stocks 22 32 22 42 32 Total Distribution 295 315 302 347 337 CY Imp. from U.S. 0 0 0 1 1 CY. Exp. to U.S. 2 2 2 3 3 TS=TD 0 0 0 Not Official USDA data 2012 Cheese production is 2012 is estimated at 310,000 MT. This is 40,000 MT or 14.8% ahead of the estimated 2011 production level. The main factors behind this significant change are: Milk supply is up necessitating extra cheese production. Exports through August 2012 are 24,000 MT higher than in the same period in 2011. The peak milk flow months for the year are still to come, and it is expected the peak will challenge last year’s phenomenal flows so it is likely over the final quarter of the year cheese production will be at least maintained at levels similar to 2011. One processor has reported that cheese production is returning them the highest margins over WMP or SMP/AMF at present. Trade and Inventories New Zealand PSD Summary Table for Dairy Product Export Projections 2013 % change 2012 % change PSD Commodity Actual Forecasts from 2012 from 2011 (1000 MT) 2011 2012 2013 WMP 1,110 1,218 1,275 4.7% 9.7% SMP 362 375 390 4.0% 3.6% Butter/AMF 448 480 474 -1.3% 7.1% Cheese 253 275 275 0.0% 8.7% Liquid Milk 123 100 120 20.0% -18.7% Sub-total Excluding L 173 2,348 2,414 2.8% 8.1% iquid Milk 2, Total PSD Exports 2,296 2,448 2,534 3.5% 6.6% Source: PSD tables New Zealand Dairy Product Export Destinations Annual Series: 2006 - 2011 % Chan % United States Dollars ge Mark Destinati 2010 et on to Share Country 2006 2007 2008 2009 2010 2011 2011 2011 280,300,05 317,730,44 374,212,47 667,100,79 1,387,668, 1,788,885,5 China 3 8 6 7 441 85 28.9% 17.5% United 528,417,65 621,199,66 705,889,14 541,790,68 514,622,52 673,265,04 States 2 7 2 4 0 1 30.8% 6.6% 287,210,25 379,975,13 486,583,88 315,095,64 404,797,95 469,192,18 Japan 9 0 6 0 0 9 15.9% 4.6% 219,069,99 275,360,65 366,541,55 259,414,03 396,888,01 426,393,14 Australia 3 2 8 6 7 3 7.4% 4.2% Philippin 234,286,99 384,007,27 386,339,32 260,750,45 389,398,48 414,122,03 es 2 2 9 3 6 1 6.3% 4.1% 129,897,90 168,175,63 212,607,50 156,116,12 164,667,79 389,919,08 136.8 Algeria 6 8 8 2 5 7 % 3.8% Saudi 196,323,23 292,797,43 370,671,89 191,141,26 286,994,43 389,862,48 Arabia 3 8 6 2 8 5 35.8% 3.8% Venezuel 109,767,18 261,790,08 466,664,81 224,827,72 334,980,02 378,373,32 a 3 5 5 5 5 6 13.0% 3.7% 151,115,93 273,092,77 370,767,50 222,863,84 286,114,71 366,393,50 Malaysia 6 9 6 6 4 6 28.1% 3.6% 150,276,69 196,673,98 323,558,63 UAE 81,049,081 75,873,247 89,628,872 0 7 0 64.5% 3.2% Rest of 2,452,234, 3,311,163, 3,540,206, 2,737,478, 3,782,844, 4,580,433,2 World 600 291 610 761 295 43 21.1% 44.9% Total 4,669,672, 6,361,165, 7,370,113, 5,726,856, 8,145,650, 10,200,398, 25.2% 100.0 Exports 886 652 600 013 665 270 % Source: Global Trade Atlas Source: Global Trade Atlas New Zealand Dairy Product Export Destinations Year To Date: January - August Partner United States Dollars % Share % Change Country 2010 2011 2012 2010 2011 2012 2012/2011 China 814,156,477 1,191,213,979 1,367,037,983 16.1% 18.0% 20.0% 14.8% United States 329,815,504 414,098,532 479,852,947 6.5% 6.3% 7.0% 15.9% Venezuela 154,162,643 188,679,548 313,359,342 3.1% 2.9% 4.6% 66.1% Japan 271,353,440 316,780,932 306,900,031 5.4% 4.8% 4.5% -3.1% United Arab Emirates 133,273,863 205,933,273 276,145,837 2.6% 3.1% 4.0% 34.1% Philippines 258,378,841 268,813,478 256,551,945 5.1% 4.1% 3.8% -4.6% Malaysia 190,303,517 245,686,501 256,058,520 3.8% 3.7% 3.8% 4.2% Saudi Arabia 168,604,400 271,272,970 239,762,721 3.3% 4.1% 3.5% -11.6% Indonesia 188,067,854 212,819,965 238,928,832 3.7% 3.2% 3.5% 12.3% Australia 263,668,868 275,989,195 232,569,956 5.2% 4.2% 3.4% -15.7% Egypt 95,300,321 133,407,361 203,729,056 1.9% 2.0% 3.0% 52.7% Algeria 100,131,745 268,452,206 193,038,262 2.0% 4.1% 2.8% -28.1% Singapore 176,817,738 192,658,376 184,426,945 3.5% 2.9% 2.7% -4.3% Sri Lanka 137,372,143 168,208,563 169,628,323 2.7% 2.5% 2.5% 0.8% Thailand 131,413,282 185,217,367 147,976,991 2.6% 2.8% 2.2% -20.1% Rest of the World 1,639,567,789 2,064,519,096 1,956,225,995 32.5% 31.3% 28.7% -5.2% World Total 5,052,388,418 6,603,751,347 6,822,193,686 100% 100% 100% 3.3% Source: Global Trade Atlas Source: Global Trade Atlas Discussion – the Impressive Rise in Whole Milk Powder Production New Zealand exports in excess of 95% of its total dairy production. The dairy sector has developed over a long period to survive and prosper under such a regime. Cows are bred primarily for protein production and now achieve milk protein levels well in excess of many other herds around the world. Processors have become very efficient at taking the water out of milk so it can be shipped relatively cheaply and used as the raw ingredient for a multitude of end products all around the world. Overwhelmingly, with some notable exceptions, the markets for New Zealand dairy products are in countries that don’t have a well developed domestic dairy sector. WMP fits very well into this trade because it can be put to a variety of end uses notably reconstituted liquid milk, and fast moving consumer goods (FMCG). The chart above documents the meteoric rise of WMP exports especially over the last 4 years with an average increase on the order of 100,000 MT per year. New Zealand is the prime player in world trade for WMP contributing approximately 45% of the total volume traded. With regard to China, NZ supplies 93% of the total imports of WMP into the PRC. In addition NZ exports WMP to an additional 112 countries around the world. While exports to China have been the primary driver in the growth of WMP exports, the rise in exports to other countries has also been impressive, having increased by 72% since 2006. At the same time the average export price has risen by 73%. In addition, New Zealand processors have continued to drive the efficiency of production up while at the same time adhering to product specifications and the levels of service demanded by their customers. By mid-2013, New Zealand will have the manufacturing capability to push WMP exports to close to 1.5 MMT in the next 2 to 3 years. Fonterra’s “Strategy Refresh” completed this year under the new CEO points to a stronger focus on serving and developing markets in China, ASEAN, Latin America, and the Middle East/North Africa. At the same time, Fonterra is looking to downsize its marketing force in the U.S. and is quoted as saying it is “rightsizing” its operations in the United States. While NZ has a dominant and very competitive position in world trade for WMP, this situation is not likely to last indefinitely. Already other countries are starting to install WMP capable driers to satisfy what looks to be ongoing demand increases for WMP. New Zealand processors are already looking beyond just commodity level WMP and are moving toward a greater number of value added products. Most of the development is in the nutritional powder format, either making complete infant formula or the value added ingredients needed in the final formulation. Nations in the fast growing developing world are the target markets. In addition there is potential to further develop cream products away from commodity level fats to specific ingredients for use in such sectors as food service. New Zealand Export Statistics for Whole Milk Powder For Calendar Years in Metric Tons Destination 2006 2007 2008 2009 2010 2011 China 61,542 51,237 44,800 171,491 294,408 302,261 Venezuela 42,803 74,043 98,922 78,213 97,021 90,078 Algeria 37,106 37,533 49,101 59,801 45,178 79,602 UAE 26,638 17,408 12,852 44,572 43,424 67,700 Sri Lanka 49,277 53,554 48,320 45,020 57,091 64,398 Malaysia 30,627 40,567 46,108 35,266 31,231 38,218 Saudi Arabia 40,620 40,056 32,345 34,851 28,538 37,701 Singapore 17,872 10,879 18,932 25,537 32,274 36,634 Thailand 21,261 22,752 18,206 19,960 28,757 30,760 Indonesia 28,383 28,000 42,888 32,887 23,342 29,955 Rest of World 288,453 303,664 194,134 270,482 267,437 332,325 Total for all Destinations 644,578 679,695 606,611 818,080 948,700 1,109,635 World Av.Price/MT $2,180 $3,021 $4,244 $2,299 $3,300 $3,780 Source: Global Trade Atlas New Zealand Dairy Product Export Statistics To United States (Quantity (T), USD, USD/T) Calendar Years 2006 2007 2008 2009 2010 2011 Liquid Milk (T) 0 512 931 582 120 0 SMP 200 204 86 178 203 513 WMP 2919 1830 693 3233 328 2399 Consumer Products 14 30 173 81 60 33 Milk Protein Concentrates 48209 50289 47752 41850 43654 46353 Butter & Fats 24439 27851 20497 31496 18502 18931 Cheese 29421 26356 16549 17465 5291 1875 Casein 34881 43947 37628 32022 22999 29456 Whey Products 4821 5635 4367 6674 5179 4628 Other Products incl Lactose 130 44 111 99 103 137 Total Quantity (T) Exported 145034 156698 128787 133680 96439 104325 Total Value in millions USD $528.4 $621.2 $705.9 $541.8 $514.6 $673.3 Average Price in USD/Ton $3,643 $3,964 $5,481 $4,053 $5,336 $6,454 Source: Global Trade Atlas New Zealand Dairy Product Export Statistics To China (Quantity (T), USD, USD/T) Calendar Years 2006 2007 2008 2009 2010 2011 Liquid Milk(T) 1962 3084 4611 5585 8168 18747 SMP 34709 16021 19275 50199 50790 77474 WMP 61542 51237 44800 171491 294181 302261 Consumer Products 258 181 168 3874 2987 2451 Milk Protein Concentrates 802 2141 1258 1715 1383 1785 Butter & Fats 12093 10886 11146 26720 19351 34451 Cheese 4188 6209 6259 9222 11702 13535 Casein 2580 1895 1549 3199 4872 6336 Whey Products 6260 5254 8271 8889 7806 10510 Other Products incl Lactose 1818 244 1316 4103 328 261 Total Quantity (T) Exported 126212 97152 98653 284997 401568 467811 Total Value in millions USD $280.3 $317.7 $374.2 $667.1 $1,387.7 $1,788.9 Average Price in USD/Ton $2,221 $3,270 $3,793 $2,341 $3,456 $3,824 Source: Global Trade Atlas Cheese Comment New Zealand Export Statistics for Cheese Desti For Calendar Years in Metric Tons nation 2006 2007 2008 2009 2010 2011 Japan 58,890 67,346 51,432 46,325 53,346 61,175 Australia 50,766 50,299 44,982 52,349 54,289 46,471 Korea, South 11,527 15,787 18,062 17,161 19,210 20,085 China 4,187 6,210 6,260 9,222 11,702 13,536 Philippines 8,926 10,533 9,066 11,447 10,867 10,186 Indonesia 2,634 5,029 5,742 7,905 7,718 8,800 United Kingdom 11,775 9,773 8,612 12,847 8,897 7,924 Saudi Arabia 11,417 13,062 9,670 12,620 8,843 6,940 Taiwan 6,340 7,188 5,648 7,279 7,126 6,865 Bahrain 697 1,505 7,471 10,246 8,147 6,736 Rest of World 110,930 100,008 59,535 81,344 57,331 50,103 Total for all Destinations 299,008 309,214 246,894 290,097 264,819 252,858 World Av.Price/MT $2,695 $3,121 $4,539 $2,923 $3,919 $4,271 Source: Global Trade Atlas, USDA PSD Cheese exports are expected to reverse their downward trend, and increase to around 275,000 MT in both 2012 and 2013. Exports for the eight months to August 2012 are 24,000 MT ahead of the previous year, and with milk supply running at such high levels, that is likely to necessitate continued elevated levels of cheese production through mid 2013. Over the last decade NZ cheese factories have not been operated at full capacity until the peak of the milk supply season October through December. However as WMP production capacity has increased, especially from 2010 on, cheese production seems to be changing to be geared more to export demand. Compared with WMP, demand for internationally traded cheese is somewhat limited. In 2011, New Zealand exported cheese to 26 different countries compared with 113 countries for WMP. Between 2006 and 2011 the export volume for cheeses fell 15%, while the price appreciated 59%. Many of the countries which are avid consumers of milk powders from New Zealand do not have a taste for cheese as it is not part of their traditional diets. Many countries in Asia fit into this category. It is hard work to increase consumption of cheese as a food item on its own. But westernization of diet with the likes of fast food chains such as McDonalds spreading through these countries is driving an increase in cheese as an ingredient. The exception to this is Japan where people were introduced to the taste of New Zealand and Australian cheese after the Second World War and now have a preference for it over and above other origins. New Zealand has a low tariff- rate cheese quota into Japan which makes it a profitable market to supply. Fonterra has just announced it is building an extension to one North Island cream cheese factory which will double its production to 20,000 MT. The target markets are Asia and Japan. Cream cheese is mostly used as an ingredient, often in baked goods. Inventory Comment Stocks held at the end of 2012 are likely to be increased over those held at end 2011, and this increase is estimated to be in the order of 67,000 MT (for the PSD commodities analyzed), an approximate rise of 20%. This is likely to be a consequence of the increased milk flows in spring 2012 resulting in the seasonal highs in stock on hand being slightly greater than normal, and some desire by exporters to delay shipping slightly in order to capture the higher prices which are predicted going into 2013. It is estimated that by the end of 2013 stocks will have been reduced by a similar amount as the increase in 2012. Exporters report that there was virtually no carryover of uncommitted stocks from the 2011/12 production season into 2012/13. While this is promising for the 2012/13 exporting campaign, some commentators are postulating that the off-shore dairy product manufacturers and re-sellers may have stocked up while prices were relatively lower so may not be in a hurry to increase their purchasing plans. Sector Policy Developments Fonterra’s “Trading Among Farmers” and the Dairy Industry Restructuring Act On the June 25th, 2012, New Zealand dairy farmers who are shareholders of Fonterra (the country’s leading cooperative milk processor/dairy products marketer, collecting about 89% of all milk produced in New Zealand) re-affirmed their support for changes to the cooperative’s constitution, entitled “Trading Among Farmers” (TAF). Under TAF, Fonterra would no longer be required to issue and redeem farmer shares on demand, instead an exchange would be created that would allow farmers to trade shares among themselves. In addition, a separate fund would be established that for the first time would allow public investment in the performance of Fonterra shares. The public fund is to be established to ensure that adequate liquidity exists in the Fonterra share exchange. However, the public fund would not have voting rights in the Fonterra Cooperative. Under the new arrangement, Fonterra would no longer be required to retain liquidity (up to $600 million) to cover redemption risk. Implementation of TAF necessitated changes to the Dairy Industry Restructuring Act (DIRA), the federal legislation which governed the Coops formation and operations. Importantly the freedom of entry/exit to the Coop by farmers was preserved in DIRA. DIRA regulates that the minimum size for the public fund is to be NZ$500 million. The methodology Fonterra uses to calculate the raw milk price paid to farmers was also encapsulated in DIRA, along with an audit function provided by the Commerce Commission. The amended DIRA was passed in to law on July 23rd, 2012. These changes have not been without controversy. In the two years it has taken Fonterra to move TAF from an advanced concept to a working system, there has arisen a growing sense of disquiet and unease among Fonterra shareholders as to whether they were going down the right path and concerns were raised that perhaps the changes could lead to the eventual loss of control by farmers of their own company. At the same time, other players in the dairy sector complained that the amended DIRA doesn’t go far enough in curbing what in their view were monopolistic tendencies of the biggest player. It is probably reasonable to comment that under TAF a larger permanent capital base will be made available to Fonterra so it can work its balance sheet harder and effect its global strategy more effectively. However, managing TAF and its ancillary entities will also involve a greater time input and there is a risk that the management of TAF could divert the Board’s attention away from the core focus of governing the business. The Fonterra Shareholders Council (the official shareholders watchdog on the Fonterra Board) have now (Sept 2012) voted overwhelmingly in favor of setting TAF in motion and the whole system is now set to be up and live with the shareholders fund in place by Christmas 2012 if not earlier. There are still some constitutional changes for the Coop to put in place but it is thought they will be voted in at the AGM in late October/early November 2012.
Posted: 10 November 2012

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