What Treasury told Bill English about the dairy downturn
By Richard Harman (author)
Treasury has released a long paper trail covering their advice to Finance Minister Bill English on dairy prices.
The department has been warning the Minister that prices may not pick up and that farm debt among a small percentage of farmers is dangerously high.
And intriguingly included in the papers are two from outside Treasury which are particularly critical of Fonterra.
Treasury does not say why they felt the Minister should be aware of these papers.
But their core advice comes in a memo to him from February 4.
Treasury told Mr English that while this season was always going to be tough for farmers with the majority expected to be in negative cash flow, concerns were also mounting over next season (2016/17) and farm gate milk price forecasts had been lowered.
“The current market average of around $5.00/kg MS for the 2016/17 season is below the sector breakeven price (around $5.85/kg MS) for dairy farmers (including interest costs)," their memo said.
POLITIK is aware of concerns within the Beehive of the impact on some farmers of another season of low prices.
These are echoed in Treasury's advice to the Minister.
“Problem loans are likely to pick up as these cash inflows dissipate in coming months," the memo says.
“Discussions with banks remain important in ensuring that banks hold provisions
commensurate with the expected increase in problem loans.
“it is important that banks continue to take a longer-term perspective in assessing viability, while
encouraging cost containment on behalf of dairy customers where appropriate.”
The papers also include two by people from outside Treasury, which are highly critical of Fonterra.
One, from Keith Woodford, an independent consultant and Hon. Professor of Agri-Food Systems at
Lincoln University says that “Fonterra is a disappointment.”
He says that company "will remain a super efficient processor and it will muddle on through it will continue to struggle in Australia."
“Fonterra will continue to have brands but will never become a global leader in brands," he says.
And other paper, from another consultant, Owen Mansill, is an email sent in March after he had met some Treasury staff at a dairy industry function.
Mr Mansill says that given how much capital expenditure Fonterra had already committed to increased expansion in milk processing facilities in New Zealand “with virtually no likelihood that there being sufficient milk to match this expansion, plus the borrowings it has made to expand what appears to be a low yielding presence in the domestic China market, I raises matters of significant concern.
“Without wanting to sound an alarmist, I perceive a real possibility that unless there is a significant improvement in Fonterra's financial performance within the next nine months, it could be in the position of either having to seek Government assistance or face the prospect of a takeover. “
Mr Mansill then explains that because of overseas commitments he cannot make a scheduled meeting with Treasury staff including the Secretary, Gabriel Makhlouf set for the following week.
But the fact that he was meeting with Treasury and that they included his email in this release suggests that they took his warning seriously.
Altogether the papers show a growing concern about the impact of the dairy price drop and there is no real evidence that Treasury is expecting any quick relief.