Chinese strategy
OPINION: Fonterra may have sold its dairy farms in China but the appetite for collaboration with the country remains strong.
In an email to farmer shareholders this morning, Fonterra chief executive Miles Hurrell explained the situation in China.
“We’re hearing a lot about the China market right now, as a reduction in demand from China for imported whole milk powder has been one of the key drivers of falling prices.
“I wanted to give you a bit more context on the market dynamics we’re seeing play out and our expectations over the medium to long term.”
Strong domestic milk supply growth in China has been propelled by high raw milk prices over the past few years.
Hurrell notes that more recently, China’s extended Covid-19 lockdown has reduced consumer demand for fresh milk products and this demand has not yet recovered to the previously forecast levels.
Chinese processors have been left with no choice but to spray dry their surplus milk, leading to high in-market stocks of whole milk powder.
Hurrell says there are reports of some rebalancing of China’s domestic milk production occurring.
“As these changes on the supply side play out, indications are demand for New Zealand product could start to return over calendar year 2024.
“This coincides with the remaining tariffs on New Zealand dairy products being removed from January 2024 as part of the NZ-China Free Trade Agreement.
“Overall, demand for dairy in China has continued to grow – just at a slower pace more recently. Looking beyond whole milk powder, our Greater China business is performing well, with demand for Fonterra’s broader product categories continuing to be strong.
“China is still the world’s top market for dairy imports and we believe imports will remain an important part of product mix for the foreseeable future.
“We will continue to watch these market dynamics closely and will update you promptly if there are any changes in the outlook for the Farmgate Milk Price as a result.”
Hurrell acknowledged that Fonterra shareholders are under pressure right now.
Two recent revisions to its forecast Farmgate Milk Price for the 2023/24 season have made the outlook for the year even more challenging.
“It’s regrettable to have had to make revisions of this magnitude early in the season.
“While we rely on market information we have at the time, I acknowledge the pace and magnitude of these recent price changes has been unsettling. I wanted to share some insights on what we’re seeing out in the market and also update you on the actions we’re taking to reduce our costs and ultimately improve our overall returns to you.”
