Uncertain economic times in a jittery world aren’t clouding the optimism of New Zealand’s $27 billion export dairy industry as players report a good year, with another to come with bright prospects.
Industry big cheese Fonterra is looking forward to tapping recent Government trade deals and says it’s well-positioned to navigate the volatility, while the smaller, high returns specialist exporter Tatua nods to its $85 million new expansion as evidence of the world’s appetite for dairy.
Fonterra chief executive Miles Hurrell says global demand for dairy remains strong and the farmer-owned cooperative’s size, scale, and broad product and market mix mean it’s in a good spot to navigate volatility and changes in market dynamics.
On the sour note of the Trump administration’s 15% tariff on New Zealand goods, Hurrell says the US is an important market for Fonterra and, at a time of rising protectionism and geopolitical uncertainty, the international rules-based trading system remains “critically important” to providing certainty and stability for Kiwi exporters.
“Tariffs and other trade barriers create additional costs across the supply chain, which are ultimately borne by local consumers.
“The 15% tariff applied to New Zealand’s exports means they are, for instance, at a significant disadvantage to those coming into the US from Canada, which is illegally subsidising its domestic producers. We are requesting that the New Zealand Government launch a WTO dispute against Canada to stop this illegal subsidisation.”
Hurrell says Canada continues to have duty-free market access under the US-Mexico-Canada trade agreement.
For Tatua, its international business is so diversified that the US represents under 10% of sales, so the impact has been small and most of the cost passed on, says chief executive Brendhan Greaney.
Tatua, a farmer-owned cooperative with a blue chip payout record, has had a “good year”, with milk payouts to farmers across the industry, while yet to be confirmed, likely to reflect that dairy is doing well, he says.
Payouts for the year ahead are also looking reasonable, “albeit with that usual note of caution”.
“Payouts for the season past and the season ahead are looking like being well above break-even for farmers, which is incredibly positive. How much of that flows into rural communities remains to be seen, because I imagine plenty of the more attractive payouts are going to be applied to farm debt consolidation,” Greaney says.
“In terms of markets, I’d say it’s finely balanced. That’s more of a general comment as we’re seeing strong milk supply growth across the big export countries, which has the potential to test the market balance with demand and possibly lead to some price softening.”
This would be less of a concern for more highly specialised or functional product producers.
Asked about other possible headwinds, Greaney says Tatua is “constructively paranoid”.
He says, “We could be our own worst enemy if we became complacent. We like to scare ourselves about what could happen so we don’t get too relaxed.
“Market access is incredibly important to us, but I think that’s all really good at the moment.”
Market access is also top-of-mind for Fonterra, which appreciates the Government’s work securing free trade agreements, such as the NZ-EU and NZ-UK FTAs and successful trade negotiations with the Gulf Cooperation Council (GCC).
Hurrell notes dairy consumption in Saudi Arabia is increasing through population growth of 1.6% a year and rising incomes. It is Fonterra’s largest Middle Eastern market.
New Zealand exported around $1.6 billion of dairy products to the Gulf region last year and is the first major dairy exporter to secure an FTA with GCC.
Back home, Fonterra will soon seek shareholder approval to sell its consumer businesses to French multinational Lactalis for $4.2b. It aims to return around $3.2b to shareholders.
Hurrell says post-sale, Fonterra will still be a business of global scale, focusing on its ingredients and food services businesses and exporting to more than 100 countries.
“The co-op has unique experience in dairy science and innovation, making it a world leader in dairy proteins and other advanced solutions. Ingredients and FoodService are where Fonterra can best apply this expertise, along with manufacturing and customer-partnering capability, to earn greater returns from farmers’ milk and capital and generate more foreign revenue for New Zealand.”