Well, the worldwide supply is still up there due to the fact oil prices are low. While this is a strange bedfellow, low oil prices do correlate with low grain prices. High oil prices lead to grain being converted into biofuel to run engines and therefore more grain to be grown, and when the oil price drops, spare grain floods the market at low prices. The current situation means that those northern hemisphere farmers with grain to spare can continue to shovel it down their cows' throats and still make a margin.
With China you have to think they will have drunk their stores dry soon and the assumption would be that they will start buying more over the coming year.
The Middle East, well that's still a basket case, and finally the Russian trade bans were supposed to last only one year. So again there is some hope that this situation will be resolved shortly.
What all this does is remind us fairly and squarely that the dairy market is a volatile beast, and more so when you're dealing with the commodity end. I think there are messages in that for us on farm and also for Fonterra.
On farm it really comes down to the pretty resounding message that plans should be based around long term averages, that have resilience built in them to counter the odd poor years. Those long term capital purchases should always be based on that average return of $6.50.
With Fonterra, one of the biggest disappointments was the reduced dividend this year. We have long heard that higher commodity prices squeeze the value add return, yet this year, commodity prices were rock bottom, and our dividend went backwards. Even though this reduction was small in comparison to the drop in milk price, it is perhaps the issue that has caused most disquiet amongst Fonterra shareholding farmers.
We can all rationalise that Fonterra can't on its own do anything to change those global events which have caused the current reduction in our milk price, but surely it can with the dividend.
We have invested a lot of our money into building up the value add proportion of the business, we have heard many good news stories about value add examples from around the world, and yet it is still to meaningfully deliver for us.
So, I like most Fonterra farmers, are wanting to see a much better improvement in those value add returns. It is critical that Fonterra start delivering more on the promise it held out for us.
As we can see from the example of Tatua, when you have strong value add business, it takes a good amount of the volatility out of things for farmers.
