KEY POINTS:
It is undoubtedly a good season to be a dairy farmer.
International dairy commodity prices have rocketed and the forecast payout to farmers from Fonterra is a record $6.90 per kilogram of milksolids which, based on last season's production, could be worth $8.6 billion.
The final tally could
be higher still with Westpac picking $7.20 as a possible final payout figure.
Considering that about 95 per cent of Fonterra's milk is exported, what is good for farmers is good for us all.
Roads, schools, pensions, healthcare, police and all other services cost money, big money, and dairy is pulling billions of foreign dollars into the economy.
However, the good times for farmers this year have angered some shoppers faced with increased prices for dairy produce.
The bad feeling can be summed up as: Why can't cheese and milk be cheaper here, considering we are a dairy-producing nation? Why doesn't the Government do something? How can these rich farmers get away with it?
Peter McClure, managing director of Fonterra Brands New Zealand, says the price is set by fundamental economics.
"Essentially the price that I pay for my raw inputs, that is milk and milk powder and cheese and butter, is driven by the international commodity prices that are being paid for those products."
The fact that milk is produced here is irrelevant, with 95 per cent exported.
"You often hear people saying, 'well you know I see the cows just down the road and we should get it cheaper', well are they really suggesting the farmer should subsidise them, and are they prepared to subsidise the farmer in poor years?" McClure says. "I suspect not."
The cyclical nature of international prices means that at some point there will be relief for consumers.
Meanwhile, many farmers are using this year's windfall to reduce debt from previous years.
National Bank rural economist Kevin Wilson says Fonterra is not a benevolent society for subsidising local shoppers.
Subsidies to keep prices down would come from the taxpayer, while price controls are arguably inefficient because they create distortions, Wilson says.
Fonterra dominates the dairy industry, so what about breaking it up to create more competition?
More competition would not necessarily mean lower prices at home, unless the fighting was so fierce it actually collapsed the international market, Wilson says.
"We are trying to add value, not destroy it." No company, Fonterra included, is going to sell its wares for less in one marketplace if there is demand elsewhere prepared to pay more.
And with dairy such a vital part of our economy we should celebrate the high prices that, either obviously or subtly, benefit us all.
The trade-off is higher prices for branded goods in our own shops.
This is a trade-off we have to deal with either by using our purchasing power to drive competition among retailers, changing brands or by simply making our favorite cheese last a bit longer in the fridge.
SHEEP MEAT RECOVERY
Rabobank says after two years of easing prices for sheep meat the tide is turning, with production declining in a number of key producing countries.
Rabobank New Zealand senior analyst Hayley Moynihan says current global demand is likely to outweigh the ability of Kiwi farmers to supply sheep meat in the short to medium term and this will strengthen prices.
"However, the ability to capture longer-term gains from this favourable market position will require additional industry investment in consumer education, promotional activities and greater efficiencies throughout the supply chain," Moynihan says.
The Australian sheep flock has declined from 120 million head in 1997 to about 88 million head in June 2007, following drought and reduced wool returns.
"That has pushed production and consequently exports up but we've already seen it start to ease back just in the last month to two months and we'd expect that to happen further during 2008," she says.
"The eventual easing of growth in Australian lamb exports is expected to lower supply availability in export markets and assist in firming prices over the short-term."
Meanwhile, reduction of flocks in Europe driven by reform of the Common Agricultural Policy has been pushing supply into the market.
"Whereas originally, of course, production increased first because stock was slaughtered but now that appears to be slowing down and there is a year-on-year decrease," Moynihan says.
"Our next processing season will be virtually 12 months away for the bulk of lambs and we will see a lot of these tightening effects come through in 2008."
Ergo better prices, although much could depend on the exchange rate in terms of the level of improvement.
Federated Farmers president Charlie Pedersen says sheep farmers understand well the situation they face.
"It [the Rabobank report] will give farmers a little more comfort than what they have had because when you're expecting something to happen and it hasn't you wonder whether the news has changed."
SHINE ON WINE
While the hot weather gripping the country may be causing problems for some, winemakers are basking in the sunshine.
As dairy farmers dry off and cull cows earlier than normal, and sheep farmers face difficulty getting animals processed, the warm, dry conditions are providing an excellent environment for the ripening and flavour of grapes.
"The weather around the country's been pretty spectacular so at this stage we're looking in good shape," Winegrowers chief executive Philip Gregan says.
"It's about delivering the right quantity of water that you keep the vine in a healthy condition but you don't over-water the vine so you dilute the flavour. So it's a very precise exercise."
And with wine exports growing 28 per cent to $751.9 million for the year ending November, healthy is the right word.
GRAPE CRUSH
Meanwhile data from the Australian Bureau of Statistics last week showed the total Australian grape crush for 2006/07 of 1.4 million tonnes was down 500,000 tonnes on the previous season.
That will produce 978 million litres of wine - a drop of 32 per cent.
Table wine inventories dropped 15 per cent, while exports grew 4 per cent to A$2.9 billion.
The expected outcome is less supply and higher prices.
However New Zealand winemakers are unlikely to receive a windfall from the situation. New Zealand Winegrowers' Philip Gregan says Australian supply has not been a big factor in our success in that market, because the two countries' wines tend to be more complementary than directly competitive.
"Having said that obviously it would seem that wine prices in Australia are going to rise ... [That] clearly makes New Zealand wine at current prices look even better."
The UK is a big market for both countries and one benefit could be a reduction in discounting "which is obviously good for everybody in the UK market because it's incredibly competitive".
New Zealand wine exports to the UK in the year ending November grew 26 per cent to $242.3 million, while exports to Australia are up 42 per cent to $210 million.
POTATO POWER
The United Nations International Year of the Potato is here.
"Why the knobbly potato" I hear you cry and not the sleek leek, richly coloured red cabbage or flatulence-inducing wee sprout?
Because the humble potato is an important source of nutrition in developing countries, and let's face it you can't beat a roastie.
Glenda Gourley, nutritionist for the Potato Product Group at Horticulture New Zealand, says up to 85 per cent of the potato plant is edible, compared with about half in cereals.
"We expect lots of interest in potatoes throughout the year as we have a huge range of fantastic activities planned," Gourley says. "In May, potatoes will be the signature food of Savour New Zealand, New Zealand's premier wine and food event."
"What are you drinking sir? Ah, yes, the chardonnay.
"May I recommend a King Edward to go with that?"
