Fonterra and New Zealand Dairy Farmers’ Ignorance, Arrogance and Incompetence

Email Correspondence…

Re: FONTERRA & NZ DAIRY FARMERS’ IGNORANCE, ARROGANCE & INCOMPETENCE

http://www.bloomberg.com/news/articles/2015-07-01/milk-spilled-into-manure-pits-as-supplies-overwhelm-u-s-dairies

http://www.theguardian.com/business/2015/jan/24/dairy-farmers-warned-milk-prices-fall-further

1) The New Zealand dairy company Fonterra is the world’s largest dairy produce exporter.

2) Until about 6 months ago, it produced about 28% of New Zealand’s overseas export income.

3) New Zealand produces about 2% of world dairy production, and most of that is exported, as opposed to the rest of the world’s production which is largely consumed within the countries that produce it. If other countries were, for example, to increase production by just 2%, theoretically there would not be a purchaser for New Zealand’s product, assuming the pricing was similar.

4) In Europe and North America, until recently, dairy production was subsidised and given quotas but these have largely now been removed, and farmers are trying to make up for lost subsidy income through increasing production – and thus this is causing a world glut in dairy produce, and hence, through simple demand versus supply economics, causing global dairy prices to collapse so far by about 40%.

5) In New Zealand’s case, this is serious, as dairy export income until recently (before prices started to collapse) amounted to nearly a third of the country’s entire export income, contributed a huge amount to the national economy and taxes to fund government spending.

This glaring development in the global dairy market has been developing for a very long time, and any first year high school student who ever studied the market could have seen it coming and have told you that a glut in supply and crash in prices was inevitable. Yet, quite unbelievably, Fonterra directors, whether through ignorance, arrogance or incompetence, while they were largely ignoring all this happening in the world market, and having been paid millions in the process for the efforts to do so – all they have largely been preoccupied with is building an ivory palace for themselves and their fat posteriors to sit in to watch the sea view while twiddling their pens in their new luxurious, expensive, headquarters on the edge of Auckland harbour viaduct precinct (which should have been built much more modestly,for example in Hamilton, and nearer to their producers rather than having any preoccupation with a sea view) without a care in the wide world for the peasant on the farm slaving his guts out to keep the wolf from the door. Incredible!

http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=11208425

PREDICTIONS:

1) As the result of all this, New Zealand is starting to go down the tubes. Fonterra has just announced it is drastically cutting its staff. About $7 to $9 billion LESS will be spent in the rural economy in the next 12 months. But more importantly, the Reserve Bank has sharply lowered the value of the NZ currency to artificially boost Fonterra’s export earnings, otherwise the company would go belly up. Yes. It is that serious. And all the Minister of Finance Bill English could say this morning on TV1 was dairying constituted only 5% of our GDP and 20% of export earnings. Yes, it is now 20% having fallen in the last three months so much!

2) I always say, weak currency – weak economy. So as our currency falls, all imports will sharply rise, petrol, diesel, machinery and lest we forget, the Government’s overseas debt rises too as the currency declines.

3) And yet, incredibly, dairy farm sale prices are still at record levels, purchased by farmers who are taking on huge loans at low interest rates. When virtually all the big four bank chief economists will tell you the break even point for most farmers is $5 to $5.75 per kg for milk solids when now Fonterra tells us this coming season’s pay-out may be $4.50 or less if prices don’t pick up and they are not. So somebody in the foreseeable future is going to be in for a rude shock.

4) Can any one please tell me why a person, who bought a dairy farm recently near Morrinsville for $75,000 a hectare, I forget the size, but lets say it was 200 hectares and it was sold for $15 million – isn’t stark, staring mad? – when it is now not even showing a profit. Why? When that same $15 million could be invested in a nice small commercial building returning 10% or $1.5 million profit for doing nothing!

5) So one really must come to the conclusion most farmers, although they generally speaking are good, honest, hard-working citizens, are a somewhat mad bunch. Good blokes, but good potential psychiatric patients too.

6) Also, I think dairy farm prices are way too high, and are going to collapse in the future when more and more farmers come to the realization this collapse in global prices this time is not a normal swings and roundabouts cycle, but is going to be long-term. And of course, this does not bode well for rural towns as well.

7) And lastly, what is beginning now with NZ, is part of the much bigger global collapse of many commodity prices, not only dairy products, and presages a global collapse in stock markets and economic depression perhaps not that very far away, as historically this is usually the course the cycle takes.

But just my opinion everyone. What do you think? Do you think it is time to tighten up the ship?

Will we follow Greece? Interestingly, I asked a lady (university degree too) the other day in a cafe what she thought about the situation in Greece, as it was on the front page of the daily newspapers in her shop. She answered: What is Greece? I replied, You know, Greece, the country which is having the financial crisis at present. She answered: I don’t read the newspapers, I have never heard of it! Not too good at geography eh?

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