Cows, Coal and Carbon -- February 2021

I was once told by someone much smarter than me that the Green Party policy of today will be Labour Party policy in 10 years’ time. Even without that level of insight, nobody who has been paying attention to the political discourse for the past decade will be very surprised at the Climate Change Commission’s recent report, though there do seem to be large numbers of people shaking their heads in dazed bewilderment.

The Commission’s report largely reflects the findings and recommendations of the Royal Society’s 2016 one, Transition to a Low-Carbon Economy for New Zealand. That report was essentially ignored by the government of the day, but it is extremely unlikely the current government will treat the latest version in the same manner.

The report calls for, among other things, an immediate end to the construction of coal fired boilers, an end to the burning of coal for process heat by 2037 and a reduction in the national dairy, beef and sheep numbers of 15% each by 2030.

No matter how climate hesitant you might be or how little New Zealand has contributed to global warming since pre-industrial times, the Commission estimates that figure to be 0.0028 degrees C, the fact remains our share of global warming is 4 times greater than our share of the total population and 1.5 times greater than our share of landmass.

While Fonterra have already committed to not installing any new coal boilers or increasing their capacity to burn coal, suppliers have every right to be disappointed that action was not taken far sooner and far quicker. Coal is the low hanging fruit of climate change and we’ve known for decades that we needed to reduce emissions. We didn’t and now farmers are bearing some of that cost through animal reduction targets.

Getting out of coal is possible though expensive and difficult. Tolerance for offsetting emissions has worn thin so tactics like buying a forest in order to keep burning coal are off the table. Likewise ignoring the government in the mistaken belief they have no teeth to enforce the phasing out of coal; the simple act of raising the cost of carbon to the point where using coal is uneconomic would soon force change.

Lobbying to exclude energy from the recommendations would have consequences for other areas; the whole report is a finely balanced tension between farming, transport and energy. If savings aren’t made in one sector they have to be picked up by another, and I’m certain farmers already feel like they’re picking up enough of the tab.

Complicating the transition from coal is the fact many of Fonterra’s North Island plants are primarily fuelled by natural gas, a resource that is predicted to run out at the same time as coal usage is slated to stop. This puts even more pressure on the Co-operative both in terms of capital expenditure and closing plants to refit the boilers; nearly every single boiler will have to be changed.

As with coal the Climate Change Commission’s targets for stock reduction seem ambitious at first, 15% fewer dairy cows by 2030, but that only equates to a reduction of 1.7% per annum. This is easily achieved by slightly lowering the replacement rate of animals lost through natural attrition.

The Commission predicts these lower animal numbers will have no impact on milk production, and this is borne out by Livestock Improvement Corporation data showing production increases via genetic gain sit at 1.8% per year, almost exactly matching the annual drop in cow population. The opportunity is there through careful breeding to allow cows to express their genetic merit by gradually dropping the stocking rate while production remains constant.

Of course, if the lower stocking rates are offset by higher use of bought in feed any emission reductions will be cancelled out.

The report also mentions land use change, a phenomenon that is already happening in areas like Tasman where many dairy farms are being planted in hops, and in Golden Bay with a number of dairy farms closing down due to frustration with compliance obligations or a desire for a less stressful lifestyle.

There’s no one single solution that will allow us to meet the ambitious GHG targets that are laid out in the report and keep farming the way we are. Based on the science that the NZ Greenhouse Gas Research Centre are aware of, a combination of all the science and changes to land management are likely to get us there, but we must have faith in the scientific solutions and keep funding them to succeed.

Daigou Disaster -- January 2021

It is surprising how quickly a company’s fortunes can change; the A2 Milk Company (A2MC) played a dangerous high-stakes game, relying heavily on an informal network of Chinese students and personal shoppers to distribute much of its product into China. It’s a game that has cost other companies dearly in the past.

Daigou, buying on behalf, is a network of Chinese nationals living in or visiting Australia who buy local products and ship them back home to groups of friends, customers cultivated via the social media app WeChat. It is not uncommon for Chinese tour groups to visit stores like the Chemist Warehouse and buy products in bulk, much to the ire of locals.

Such is the demand from China for Australian packaged products that in 2019 a Sydney store owner was found to have stockpiled 4,000 1kg tins of baby formula ready for export.

Covid-19 has stopped daigou in its tracks with Chinese students and tourists no longer able to visit Australia now or for the foreseeable future. In December A2MC slashed its full year earning forecast from $1.8 billion to $1.4 billion and saw its share price dive by 23%, placing the blame squarely on interruptions to the daigou channel.

A2MC’s misfortunes are not, of course, confined to themselves. As a shareholder of Synlait and one of their largest customers, they are dragging Synlait’s share price and profitiability down with their own.

Daigou grew from a handful of personal shoppers to a multi-billion-dollar backchannel into China in the wake of the 2008 baby formula scandal, a disaster which left 300,000 Chinese infants sick. Confidence in local supply never recovered and demand for Australian product in the original Australian packaging skyrocketed

The daigou channel has been the making and the breaking of more than one publicly listed company in Australia. New e-commerce regulations introduced by China in 2019 saw many smaller daigou purchasers exit the market due to more onerous paperwork. Some goods attracted higher safety requirements than had been needed before and were also subject to stricter tax requirements, regulations that had an immediate negative impact on vitamin maker Blackmores. Blackmores, who had been experiencing double digit growth on the back of daigou transactions, saw sales immediately slump and their share price drop by 23% while $531 million was wiped from their valuation, setbacks from which they never fully recovered.

Analysts at the time were concerned A2MC would experience the same troubles as Blackmores, but they were quickly assured that the new Chinese laws didn’t affect baby formula and business continued apace.

A similar fate befell Bellamy’s Organic Infant Formula in 2017. After a meteoric rise on the daigou wave and taking 21% of the Australian market share, Bellamy’s started discounting their infant formula through their official online Chinese channels. Bellamy’s had a strong presence on online retailer Alibaba and began participating in their famous “Singles Day” sales. Daigou shoppers, who didn’t have access to these discounted prices in Australia, found their margins slashed and abandoned Bellamy’s Organic in favour of A2 Platinum infant formula.

Bellamy’s, who were suffering from other issues as well, never recovered from being deserted by their daigou shoppers and have now been taken over by the Chinese Mengiu Dairy Company. The A2MC stepped in to fill the void and have been reaping the benefits ever since.

Given the tensions between China and Australia and the uncertainty over when international students will return it remains to be seen if the A2 Milk Company can buck the trend and survive the collapse of its daigou channel.

A2MC once had a unique, premium product but now they’re facing stiff competition, with nearly every dairy company with a presence in China putting A2 products on the shelves as fast as they can to take advantage of the sudden void.

Once Chinese consumers abandoned Bellamy’s Organic in preference for A2 Platinum they never came back, it is not yet clear whether they’ll return to the A2MC fold once the Covid induced dust finally settles.

Wannabe Lobbyists -- November 2020

An exchange on Twitter caught my eye this week; a Waikato dairy farmer had landed a new 50:50 sharemilking job for the next season and was posing proudly with his family while holding a copy of his new Federated Farmers Herd Owning Sharemilking contract.

After some light hearted banter, the farmer was asked when he was going to sign up and become a Federated Farmers member. Tongue firmly in cheek he replied that, contracts aside, the only good thing to ever come out of the old boys club that was Feds was that they fought to keep Rural Delivery going. It was pointed out to him that Federated Farmers advocate strongly on local and central government issues for farmers. “What then,” he quite reasonable asked, “is the difference between Federated Farmers and DairyNZ?”

This was an excellent point and made me ponder what exactly the groups advocating on my behalf deliver, and is it what I want.

In recent years Fonterra has moved from arguing with everything the Government announces to constructively working with those in power. Despite lingering accusations from some farmers that this is “sucking up”, the Co-operative has been able to make significant gains in areas like the Dairy Industry Restructuring Act (DIRA), and softening the impact on farmers of polices like freshwater reform and zero carbon. Fonterra does these things because they’re good for Fonterra and their farmers, so I’m happy for them to continue down this path. By happy coincidence I think the leadership role they’ve taken on environmental issues is also good for the country, and I’ve made good use of the support offered to farmers in the form of their Farm Environmental Plan services.

The Fonterra Shareholder’s Council is another entity that shifted into a farmer advocacy role when that’s not really their function. This was most obvious to me with the SHC’s press release on proposed changes to DIRA, while no doubt reflecting some farmer’s views it was quite inflammatory and at odds with Fonterra’s stance. I understand the SHC is not Fonterra but too many people, politician included, don’t differentiate. The SHC definitely has a farmer advocacy role to play, but that is by supplying farmer feedback directly to Fonterra’s Board, not by issuing press releases with their opinion on Government policy.

DairyNZ receive a levy from all milk producers in New Zealand and have used this to pay for research and development to make all dairy farmers more efficient and profitable. I still have a ring binder in my office with their Facts and Figures for Farmers series that I bought while at university. While the internet has made my ring binder obsolete, DairyNZ has always been the go to place to find up to date resources and data about the New Zealand dairy industry. With that in mind it’s disappointing that they seem to be changing their focus to that of a being a lobby group. To my mind, DairyNZ should be in the background supplying the scientific muscle to support farmers and farmer advocates.

Federated Farmers is the organisation that was set up to advocate for all farmers at both local and central government levels and their strength is in their broad membership base. Each region knows their catchment intimately and can focus their local knowledge on an issue with laser like intensity. This strength can also be a weakness because, at a local level, the battle is often being fought by members who still have the mind-set that working with the government is the same as sucking up to them.

Federated Farmers care deeply about whatever issue is in front of them at the time, and they will fight to the death for farmers on that issue, but you don’t need to win every battle to win a war and trying to win every single battle is not always the best tactic.

I am not for a minute pretending Government relations is easy, and I don’t envy Federated Farmers for the scale of the task they have, a task that seems to be made more difficult by the regional groups saying whatever they think is necessary to keep their members happy.

As the person who pays DairyNZ, Fonterra and Feds, I’d like to see them helping to protect my business by sticking to their strengths, and I’d like every other wannabe farmer lobbyists to get out of their way and let them get on with it.

Election 2020, The Red Tsunami -- October 2020

I had intended to use this month’s column to look back at the three years which have passed since the farmer protests in Morrinsville and determine if a Labour/New Zealand First/Greens Government was as scary as predicted.

Events overtook me and clearly, since Labour won the party vote in all but four electorates, it wasn’t that scary at all.

At the last election farming issues were front and centre in a highly divisive campaign that left farmers feeling kicked around like the proverbial political football. At the heart of this division was the proposed water levy, a proposal that didn’t even make it past coalition negotiations, which generated a lot of heat while distracting from the real message David Parker was trying to push; freshwater reform.

This election, in the wake of plummeting tax receipts and a higher than normal reliance on income from agricultural exports, every single political party was courting the farming vote. Even the Greens, whose policies make most farmers roll their eyes, were offering large amounts of money to the rural sector in order to ease the pain of adjusting to a world seen through Green eyes.

The Government didn’t get a free ride on these issues, they’ve had a very high profile in the media both nationally and locally, so how much damage did it cause them? The answer would be none.

Traditional and primarily rural National party strongholds like Canterbury, Waikato, Southland and Taranaki are no longer strongholds with Labour either winning the electorate vote or dramatically reducing National’s majority.

I and many others thought the oil and gas ban and potential loss of high paying jobs in Taranaki would translate into a loss of support for Labour, instead Labour were rewarded with both the party and electorate vote in New Plymouth.

The same can be said for the National Policy Statement on Freshwater, which contains arbitrary and in some cases unworkable rules around planting and grazing for Southland, yet that criticism had no effect and Labour also won the party vote there.

On the flipside, National’s inability to articulate a clear alternative vision combined with infighting, leaking and frequent leadership changes caused them immense damage. Todd Muller and Nikki Kaye staged a bloody coup to oust Simon Bridges, the likes of which hasn’t been seen in New Zealand politics since Jenny Shipley rolled Jim Bolger in 1997. National didn’t win the following election that time either.

Obviously not all farmers gave Labour their vote, and some who did voted in the hope Labour would be in a position to govern without the Greens, but the fact remains Labour have been given an overwhelming mandate to move forward with their key policies. Jacinda Ardern made it very clear in her speech that she will seek consensus for “the benefit of all New Zealanders” and throughout the campaign Labour have announced incredibly centrist policies.

I’ve been accused on social media of living the good life and being able to take it easy because I farm on the Canterbury Plains rather than in Southland where the perceived goal is to eradicate farming. The truth is we’ve been operating under strict rules implemented by ECan that predate the current Government; renewed consents to farm, farm environment plans, lowering nitrogen caps and increased reporting requirements all came in under a National Government. The changes that were coming to all New Zealand farmers have been well signalled.

I’ve heard farming leaders being interviewed since the election and they all seem shell-shocked, some expressing hope that Labour will govern alone and others wishing that farmers will finally be “given a break”.

The answer I want our leaders to give in these interviews is a simple and clear one; the election results are interesting but they don’t change our core goal, to work constructively with the Government of the day to the benefit of all farmers and New Zealand.

Democracy spoke, deal with it.

Fonterra's Dividend, My Five Cents -- September 2020

It has been quite the year for Fonterra, the co-operative not only won unanimous parliamentary support for the changes they sought to the Dairy Industry Restructuring Act, they also returned to profit after last year’s first ever financial loss. That profit, a stunning $1.3 billion turnaround from the previous season, saw Fonterra pay suppliers their fourth highest payout in the Co-op’s history; $7.14 per kg of milksolids and a 5c dividend on shares.

As dairy farmers we have been pretty well insulated from the worst financial effects of the pandemic, it has been business as usual thanks largely to Fonterra’s ability to navigate the strict requirements of operating under various levels of lockdown and to quickly react to changes in demand caused by Covid-19.

It struck me as curiously ungrateful, then, that the first response I saw on social media to Fonterra’s excellent result was a complaint the dividend was too low. This, it turns out, was not an isolated expression of that sentiment.

Last year every single worker at Fonterra who had earned a bonus was made to give it up, as well as forgo any pay increase, to help the Co-op achieve its self-imposed target of reducing operational expenditure by $160 million. Despite the brutal timing of the announcement, just after performance evaluations had been completed and just before the payments were due to be made, everyone from the shelf stackers at FarmSource to the people selling our products overseas worked their butts off to turn Fonterra around. They can be rightly proud of what they’ve achieved and we should never dismiss the sacrifice they were forced to make.

Complaints about dividend also reveal a fundamental yet common misunderstanding about the relationship between payout and earnings; the more Fonterra pays suppliers for milk the lower their margin on value added product, so the less money there is available for dividend. In the most basic of terms a high payout generally means a low dividend and vice versa, which is the underlying reason independent processor are always accusing Fonterra of paying farmers too much.

This year was also the first time dividend has been paid under Fonterra’s new policy; the Co-op will no longer borrow in order to pay one and any payment will only represent forty to sixty percent of their net earnings instead of the previous sixty five to seventy five percent. Such is the cost of having a financially prudent Board who value the long term health of the Co-op.

While there is provision in the new policy for proceeds of asset sales to be disbursed as dividend, it was well signalled that the earnings from the sale of Tip Top and DFE Pharma were earmarked for debt reduction. And reduced it was, by a significant $1.1 billion.

I’ve been proud of Fonterra this year; they have continued their strategy of showing leadership on issues of national importance, think freshwater reform and climate change, they not only ditched the horrific 90-day payment terms but introduced faster payments for small suppliers, and the management team continue to connect with farmers in a way Fonterra has never previously managed.

I for one am happy with the 5 cent dividend, especially if it means there’s enough left over to pay bonuses to those who so richly deserve them.

Spontaneous Fractures -- August 2020

 It’s a little daunting starting a new dairy season when you’re coming off the back of the best season the farm has ever had; record production has the effect of setting high expectations of yourself and your staff, and the desire to beat the previous year’s results is foremost in your mind.

Mid Canterbury has had the perfect start to the 2020 season; pasture covers lifted in June thanks  to mild temperatures and good rainfall while all the cows were off farm, and the continuing mild and dry weather since the cows came home has made this one of the easiest calvings I can remember.

While I’ve been making the most of the fine and settled weather I’ve also been waiting for something to go wrong, after all nothing this good can last forever.  I’ve been maximising the benefits of the great conditions while simultaneously bracing myself for an adverse event along the lines of the snowfall of 2006, the one that left this farm without power for twelve days and others in the dark for much longer.

Sure enough things did go wrong. Awfully, spectacularly and terribly wrong in a way I never imagined they could.

Around the 20th of June each year I walk the heifers back from grazing at my neighbour’s place so they can calve conveniently next to the cow shed. This year my neighbour called to say there were three heifers lame on their front feet and, being the conscientious man he is, he’d scoured their paddock for anything that might have caused them physical harm but found nothing.

Those three animals weren’t going to make the trip home unassisted, so we left them behind and made the short journey back to the farm with the rest. By the time we’d finished the two kilometre walk I had two more heifers limping on their front feet.

I’m no stranger to lame cows but I’d never seen anything like this so, after my own inspection revealed nothing obvious, I administered pain relief to all five animals and called the vet.

Shannon from VetLife Ashburton arrived in short order and it was clear from the look on her face as she got out of her truck that she knew what was up, and it wasn’t good. A quick examination of the closest animal confirmed her fears, spontaneous humeral fractures; all five heifers had broken shoulders.

I was horrified and asked if there was any chance they could recover. Shannon had heard this before and was quick to point out I’d been fooled by the benign nature of the term fracture, in reality the bones had exploded in spectacular fashion and the only course of action was to put the heifers down.

There doesn’t need to be any great physical exertion on the animal’s part for the bone to break, they can be walking normally down the track and suddenly pull up lame. The fracturing truly is spontaneous.

The exact cause of the fractures isn’t fully understood; though copper deficiency as a calf is known to be a factor preventing animals from reaching peak bone mass. Fracture doesn’t convey the full horror of what happens in these instances, and Shannon took a bone to display in the clinic to help raise awareness of the severity of the injury.

It’s an issue unique to New Zealand, first reported here in 2008 and affecting some 4% of dairy farms, approximately 5000 heifers are thought to be lost to the condition each year. Affected farms all over the country have reported losses ranging from 1% to 25% of their replacement heifers, though I have heard anecdotes about a farmer who suffered losses of 50%.

I was bitterly disappointed when a liver biopsy confirmed copper deficiency as the likely cause, our copper supplementation regime hasn’t changed in years and we’ve never had any issues before.

We’ve lost 10% of our heifers to spontaneous humeral fractures this year, a fact that I find very upsetting and quite embarrassing, not to mention the distress of the afflicted animals and the need to act quickly to end their suffering.

Until now I’ve kept this situation to myself, sharing it only with people who absolutely have to know, but seeing Shannon’s frustration at getting farmers to understand the severity of the problem and the simplicity of the prevention convinced me to put my feelings aside and talk about it here.

Very few people check the trace element status of their young stock, but this is one of those situations where you definitely don’t want to find out about it the hard way.

Desperate Lobbying For The Status Quo -- July 2020

You could be forgiven for thinking the Dairy Industry Restructuring Act (DIRA) reforms were a done deal; a cross-party panel of MPs had unanimously recommended a raft of sweeping changes that addressed issues that have been plaguing the industry for years, and they did so with a refreshing display of clarity, common sense and unity.

After eight years with no changes, a period during which independent processors have been given a leg up at the expense of New Zealand dairy farmers, the Select Committee decided that DIRA had achieved its goal of fostering competition in the dairy industry and it was time for all processors to stand on their own merits.

Having failed to convince the Select Committee to maintain the status quo with their formal submissions, the independent processors are now publicly lobbying to keep the uneven playing field tilted in their favour. They have arranged a last minute meeting with the Minister of Agriculture in an attempt to stop the legislation being passed before the election so they can have another go at arguing for the retention of DIRA’s open entry provisions.

The removal of open entry would mean farmers that leave the co-operative to supply other processors can no longer automatically return at a later date.

Fonterra’s competitors have fought hard for many years to retain open entry, the rule that forces Fonterra to accept milk from anyone who wants to supply them, because it makes it far easier for them to poach supply from the Co-operative. This provision has been responsible for a massive spike in dairy conversions as it forces Fonterra to collect all the new milk whether they want to or not.

I’m disappointed but not surprised by this cynical politicking; Miraka admitted to the Select Committee that they had no desire to attract any more suppliers, so I can only conclude their passion for retaining the open entry provision is to weaken Fonterra.

As all independent processors benchmark their milk price to farmers on Fonterra’s payout, a weaker Fonterra means higher margins for themselves.

Open Country Dairy were so determined to force Fonterra’s payment to farmers down, they recently took the Commerce Commission to the High Court over the way Fonterra’s milk price is calculated. The High Court ruled that Fonterra, the only processor with transparent milk price calculations, were paying farmers correctly and fulfilling their obligation to give their farmer shareholders the highest possible return for their milk.

In a scenario where open entry is removed as the Select Committee recommended, independent processors would be faced with having to convince potential new suppliers of the economic benefits of switching processors. Part of this could entail showing how they arrive at their milk price rather than just promising to be in the vicinity of Fonterra’s payout, and if there’s one thing these foreign backed processors don’t want it’s transparency.

One thing became abundantly clear as I watched the independent processors make their submissions to the Select Committee, their entire motivation for maintaining the status quo was to hamstring Fonterra in an attempt to boost their own margins.

Having failed to make that argument at an open hearing they now want to try it behind closed doors, and I can only hope the Minister sees that it hasn’t improved with age.