Dairy price cycle has many drivers

JAMES HOUGHTON
Last updated 07:52 02/10/2012

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OPINION: Fonterra's $19.8 billion revenue result for the 2011-12 season was good news for New Zealand and especially Waikato, as we will all be sharing in some kind of spin-off from a record-breaking production year.

Every day we send our children to school, use a hospital or drive on the road we can be thankful we have this New Zealand-owned co-operative company leading such a strong industry.

This result is a fitting send-off for Fonterra's outgoing chairman, Sir Henry van der Heyden.

Of course, this season is looking a whole lot tougher for dairy farmers and even a predicted global shortage of dairy product due to the widespread drought across the United States seems unlikely to hit in time to lift commodity or payout prices significantly. The cyclical nature of rising and falling dairy prices is nothing new but it does seem to have shortened.

Much of it is also based on perception rather than reality. As prices start to rise, farmers feed their stock more to take advantage, especially in other markets that are based on grain feeds rather than pasture. This can result in billions more litres of milk being produced.

While production increased 2 per cent in the US last year, which sounds small, their average annual production is about 84 billion litres of milk.

That 2 per cent increase would equate to something like a 10 to 15 per cent production increase from New Zealand farms.

This level of additional product then spooks the commodities buyers who perceive an oversupply and drive prices back down. This is why, despite a bumper production year in New Zealand, Fonterra was still about $1 billion short of the $20b revenue barrier. Still it is a good target to aim for, although this season may not be the season either.

There are other factors such as the continuing global economic uncertainty and the climate playing a huge part in where prices sit. The four consecutive rises in the GlobalDairyTrade commodity auctions has broken a long negative trend and the American drought has caused dairy production to plummet.

This is likely to mean a rise in prices and then farm-gate returns, but probably not soon enough to spare Kiwi farmers from a lean year. It is nice to think, however, that if we can get through this season, the following is likely to be a lot more comfortable.

I want to remind farmers that although they may be feeling frustrated, it is important to remain professional when they are dealing with staff at any organisation.

There is no point in shooting the pigeon for the message it is carrying. Most of the time those who are delivering bad news have nothing to do with making a decision and this is important to bear in mind.

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The project around local government reform is continuing and Federated Farmers has made its submission on it last week. The federation's stance is that councils need to stick to their knitting and concentrate on their core business, which is providing services for their communities. There has been a bit of talk out there about council amalgamations and other big ideas but the question is: are the benefits really there?

Farmers have been saying for years that rates are spiralling out of control, with some of us regularly paying $10,000 or more a year on our land.

Auckland has its reformed council and yet it also has ratepayers paying $10,000 - and just for a house. Rather than focusing on amalgamations and the "bigger might be better" proposition, we should be looking at what our existing councils are doing.

We live in an increasingly politically correct world, with bureaucracy running rampant around us. Wouldn't it be great if there was a requirement that every time there was a new law passed, our regulators had to take two old ones out of circulation?

In no time at all we would probably be back to a functional 10 or so.

Our society does seem to be moving away from rationality and into a place where emotion takes precedence over science. This is certainly the case with the recent Horizons Regional Council's One Plan regional policy, with all manner of people making all kinds of attacks on farming because Federated Farmers lodged an appeal.

What these people fail to grasp is our country is not an environmental disaster and what would happen if farmers across that region, or anywhere else in the country, could no longer make their profession pay. Pests and weeds would run wild across the landscape, leaching their own nitrogen into waterways and generally making a mess. Also, we would see a mess in the public services, such as schools and hospitals, as they closed due to a lack of funds and resources.

Interesting how the Greens have been talking about making political lobbying conversations open and public. I think it would be interesting to see what kinds of conversations are being had by the minister for the environment and his inner circle of elite advisers.

Are the squeaky wheels being given all the oil over fixing what is actually broken?

James Houghton is Federated Farmers Waikato provincial president.

- Waikato Times

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