China cyber spies may be watching you - CNN

(CNN)About a year ago, China and the United States formally agreed not to conduct or knowingly support the cyber theft of each other's intellectual property.

So, how is that agreement working out? 

Not great, said Adm. Mike Rogers, head of US Cyber Command.

"Cyber operations from China are still targeting and exploiting US government, defense industry, academic and private computer networks," Rogers said last April during testimony before a US Senate committee. 

Cyber theft of US trade secrets can easily ruin American businesses and result in higher prices for consumers. Even more worrisome, stolen American military secrets could put US servicemen and women at risk during combat.

Related story: US, China swear off cyber theft 

"Russia and China are growing more assertive and sophisticated in their cyber operations," White House spokesman Josh Earnest told reporters last July.  

China's cyber tactics may be getting "more assertive," but the number of China-based hacking instances against the US government and American companies has declined in the past two years, according to US cyber security firm FireEye. 

Despite all the fingers pointed in its direction, Beijing has long denied any responsibility for hacks and attacks — instead blaming internal "criminals" and rogues.

Related story: Chinese cyber spying decreasing, report says

In 2004, an FBI probe nabbed an American engineer named Chi Mak who was convicted of trying to send digital information about secret US Navy technology to the Chinese government. The investigation is detailed in CNN's Original Series "Declassified."

How cyber spies operate 

Sometimes cyber-spy targets might surprise you. A June New York Times reportdescribed how Chinese hackers took over a "dusty old computer" at a small welding company in Belleville, Wisconsin, to stage global assaults.

"We were totally freaked out," co-owner Lori Cate told The Times. "We had no idea we could be used as an infiltration unit for Chinese attacks." 

CBS News reported on how China-based spies use malware and spear phishing to allow hackers to watch you at your desk without your knowledge. Spear phishing is harmful email disguised to look like it's from a familiar business or someone you know. 

The bad guys want you to open the email, click on an attachment and boom — your computer is now working for the spies. 

Related story: China denounces US hacking charges

Countries like China are turning "to proxies (to) do their bidding in order to provide plausible deniability," said Frank J. Cilluffo the director of the Center for Cyber & Homeland Security, during testimony last February before a US House committee. 

Hacker groups known by names like Deep Panda, C0d0so0 (aka Codoso) have been blamed for raiding computer systems at law firms, banks and Forbes. 

One group which has been "attributed to China" has been dubbed "Mofang," reports Wired. 

"Mofang has targeted government agencies in the US, military agencies in India and Myanmar, critical infrastructure in Singapore, research and development departments of automotive companies in Germany, and the weapons industry in India," Wired reported in June.

Not only could stolen data be used to copy new American products and secret military technology, Cilluffo warned it could be used as a weapon "to blackmail and recruit Americans" — potentially to be forced to act as Chinese agents.

Sometimes the espionage is about defending against an enemy. 

"Beijing also selectively uses cyber attacks against targets it believes threaten Chinese domestic stability or regime legitimacy," said James Clapper, US director of national intelligence, during congressional testimony last February. 

What cyber spies want

"China's aggressive collection efforts appear to be intended to amass data and secrets (military, commercial/proprietary, etc.) that will support and further the country's economic growth, scientific and technological capacities, military power, etc. — all with an eye to securing strategic advantage," Cilluffo said. 

Sometimes the spying may be about getting the inside track. 

Cyber spying malware has been linked to China in arbitration over islands in the South China Sea claimed by the Philippines but occupied by China, according to a report in The Hill. 

An antivirus firm called F-Secure found malware linked to China on computers in the Philippines' justice department, a law firm representing a party in the dispute and members of the Asia Pacific Economic Cooperation Summit, The Hill reported. 

Sometimes it's simply about copying hardware. 

Countries can save untold money and time by stealing information that will help them duplicate rival products and weapons, instead of developing them legitimately. Last March, a 50-year-old Chinese citizen named Su Bin pleaded guilty to conspiring to hack into the computer networks of top US military contractors to pilfer sensitive information to send to China.

data for China about Boeing's C-17 military transport. 

He worked with two unidentified people for more than five years to target military data, including information about Boeing's C-17 transport plane and certain fighter jets, the Justice Department said.

Related story: Chinese man admits spying on Boeing

Clapper: Cyber intrusions blur war and peace

Overall, China has been successful in using cyber espionage against the US government, its allies and American companies, said Clapper.

He predicts China will continue to challenge the US at "lower levels of competition," including "cyber intrusions, proxies and other indirect applications of military power — that intentionally blur the distinction between peace and wartime operations."

In other words, get used to looking over your shoulder, because it's likely that the threat of cyber espionage blamed on China will be with us for a long, long time. 

CNNMoney's Sophia Yan contributed to this report.

4 to 1 margin economists bet Clinton is better than Trump in managing economy - Forbes

Throughout his presidential campaign, Donald J. Trump has pledged to put “America first,” suggesting that the country’s estimated 11 million undocumented immigrants should be deported and flatly rejecting the concept of globalism. But because of the potential economic consequences of these stances, a group of business economists is now flatly rejecting him.

A policy survey of National Association for Business Economics (NABE) members released Monday shows that 55% of business economists feel that former Secretary of State Hillary Clintonwould do the best job as president of managing the U.S. economy. The candidate with the next-largest percentage of the vote was Libertarian candidate Gary Johnson: 15% of NABE members said he’d do the best job managing the economy. Another 15% or respondents said they didn’t know who would be best or that they didn’t have an opinion.

Just 14% chose Donald Trump.

The survey results are remarkable because NABE members aren’t your average ivory tower-dwelling, left-leaning egg heads. They work for businesses, trade associations and government agencies across the country. As NABE director and survey chair LaVaughn Henry put it, these are people who have skin in the game.

“You’re speaking of people who advise business leaders on day-to-day and long term issues where the outcome has to be one way or the other, it can’t just be, ‘let’s study it or research it forever,’” he told FORBES in a recent interview. “These are people who are actually helping to make decisions of do we produce here, or do we produce oversees; do we consume more, consume less.”

Henry posited that one of the reasons a group of conservative-to-moderate business economists overwhelmingly chose Clinton over Trump is that “a definitive plan has been out there for months to stew over and study and make decisions about. It’s one thing to say, ‘this is my plan, A-B-C-D,’ versus, ‘just trust me.

It’s not just Trump the candidate that failed to gain traction with the 414 members NABE polled; it’s many of his ideas. On immigration, just 8% of respondents said they favor deportation of all undocumented immigrants (a keystone Trump policy); 80%, meanwhile, said they believe the government should expand visa programs, like the H-1B program, for high-skilled workers, and 64% said they favored a legalization process for undocumented immigrants currently living in the U.S. When asked broadly how the next administration and Congress should be towards immigration, 61% of NABE members said the government should be more relaxed as to allow for increased immigration.

On issues of trade, 65% of NABE members say the next presidential administration should be more open and free; Trump, meanwhile, has offered a more protectionist vision for the future. Forty-seven percent of business economists said the U.S. should approve the Trans-Pacific Partnership (TPP) agreement in its current form and other 30% said the U.S. should seek more favorable terms first and then adopt the pact; Trump has called the TPP “a horrible deal. It is a deal that is going to lead to nothing but trouble.”

Henry said that NABE members fundamentally disagree with that view. “Business economists recognize value of trade to the economy,” he said. “The Pacific Asian theatre is so growth-oriented and will be for decades that we shouldn’t cut off our hand before we put it in the pot.” That said, he understands why the TPP has become such a big issue this election cycle. “When you don’t have a job because of trade, unemployment to you is 100%,” he said.

The August 2016 survey marks the first time since 1992 that NABE directly asked its members about their presidential preferences. Back then, 59.5% said that then-president George H.W. Bush’s policies would be better for maintaining stable growth – but they also (correctly) predicted that Bill Clintonwould win the election. 

By NABE’s own estimation, the only other two times presidential politics factored into an economic outlook survey was 2004 (when members said they wouldn’t change their economic forecasts whether George Bush or John Kerry were elected) and 2008, when respondents similarly said that the election’s victor would not materially affect GDP growth over the coming two years. 

The August 2016 economic policy study is not the first time Trump and Clinton’s economic plans have come under economists’ scrutiny. A pair of analyses from Moody’s recently found that Trump’s proposals could potentially raise the deficit and hurt GDP growth, while Clinton’s had the potential to spur economic growth and lower unemployment.

Whether or not Trump is elected, the damage might already be done: 62% of NABE respondents said that uncertainty about the presidential election is holding back economic growth somewhat or significantly.

“Any introduction of increased risk, increased uncertainty, questions of ‘will I have a job next year, or will I not?’ really does factor into people’s buying decisions. You see these broad groups pulling back, saying ‘let’s just wait to spend, let’s see where things go,’” Henry said. “Our survey didn’t say it, but others have said, if one of the candidates wins, we may be in for a recession. I won’t say who, I won’t name names, but people are saying. Many people are saying.”

Why China's one belt one road plans to go through Singapore ? - Bloomberg

As the son of a man who journeyed from China to Singapore and founded a shipping business a half century ago, Teo Siong Seng sees his life as one immersed in the ancient trading networks of Asia.

So the managing director of the Pacific International Lines Group is seeking to benefit as China rejuvenates its Silk Road routes to the Middle East and Europe. He is setting up a joint venture with China Cosco Shipping Corporation Ltd. to help China’s largest shipping group build connections in Southeast Asia and beyond.

“Chinese companies alone may not have enough experience to carry out their investments in other countries,” said Teo, who’s also chairman of the Singapore Business Federation. “To cooperate with companies like us would also make their businesses smoother. They have to learn the way we deal with local people and the way we do business.”

Teo Siong Seng. rg

  

Photographer: Bryan van der Beek/Bloombe

The venture underscores Singapore’s potential as a gateway to Southeast Asia for China as President Xi Jinping seeks to export excess industrial capacity while building influence overseas. Lured by shared cultural bonds and the former British colony’s legal and financial systems, the number of Chinese companies registered locally has almost doubled in the past five years to more than 7,500

Exploiting Singapore’s regional familiarity could help Chinese companies navigate local politics complicated by tensions over China’s territorial claims in the South China Sea. It could also help them avoid pitfalls from prior investment in Africa and Latin America, where China has faced criticism at times for a heavy-handed approach, insisting for example its companies and laborers carry out the bulk of a contract.

“From all the failures, Chinese have learned that they need a local broker,” said Gao Zhikai, a board member of coking coal distributor Winsway Enterprises Holdings and former vice president of crude oil giant CNOOC Ltd. “Chinese companies believe Singapore companies are easier to deal with and they know how to deal with different markets.”

Xi is offering vasts amounts of money to Southeast Asia for infrastructure projects for the maritime portion of his revitalized Silk Road. Combined with an overland route through Eurasia, the project is known as “One Belt, One Road.”

For Beijing, the project is a solution to the industrial overcapacity that has built up in many sectors. It’s also the economic carrot of Xi’s push to make China a regional power and challenge decades of U.S. dominance in Asia. Greater trade and investment could blunt concern over the country’s military expansion and its territorial ambitions.

Investment company Fosun International -- one of the largest private groups in China -- set up its Southeast Asian headquarters in Singapore last year. “Chinese companies have to pick the right platform and springboard before making an international move, and Singapore is a very good choice,” said chief executive officer Liang Xinjun.

China’s relations with Southeast Asia are deeply rooted in history and the region’s trading culture. Some Chinese Singaporeans, like Teo’s father, migrated from Chinese provinces like Fujian during the second Sino-Japanese War in the 1930s, and ethnic Chinese traders had been plying routes in the area for centuries before.

China has looked to Singapore before: The country in late 2015 hosted the first summit between Taiwan and China in seven decades, while late leader Lee Kuan Yew was seen as a regional voice of counsel on China relations. Many Chinese officials tread a path each year to Singapore to study its political model.

Singapore has the largest ethnic Chinese population in the region, at nearly 75 percent, and is China’s largest foreign investor. More than 20 percent of its gross domestic product is linked to China, according to Natixis SA.

Chinese business flowing through Singapore could help as its economy faces what could be its slowest-growth year since the global financial crisis, hurt by a slowdown in trade, weak commodity prices and job cuts in the banking industry.

Still, while Southeast Asian nations are hungry for infrastructure funds to meet the demands of their growing populations, China shouldn’t expect an unconditional open door.

‘More Cautious’

"Many countries in Southeast Asia are becoming more cautious when dealing with Chinese companies, which have a relatively bad track record in implementing deals over the past decade," said Winsway’s Gao, who is also director of the China National Association of International Studies.

"Given the growing tensions over the South China Sea, Chinese firms have to be even more careful in putting the deals in practice,” Gao said. “Even a small mistake could cause a major negative reaction.”

China may look to Singapore to help smooth over the territorial frictions it has with some Southeast Asian nations. The U.S. navy uses Singapore as a gateway to the South China Sea for its ships and surveillance planes, and Singapore has called on China to tread carefully.

On a company level, there is progress. Singapore’s Ascendas-Singbridge Group created a joint venture last year with China Machinery Engineering Corporation to invest in industrial and technology parks in Asia. Ascendas-Singbridge Chief Customer Solutions Officer Aylwin Tan said the venture expects to announce its first project within six months.

“We find that trust is the most important element in the Chinese business culture,” Tan said by e-mail. “Singaporeans can better appreciate the Chinese culture, and understand the spoken and unspoken rules of doing business in China.”

Still, there will be difficulties ahead, according to Bernard Chan, president of Asia Financial, an investment holding company. Some nations in the region have relatively opaque -- and complex -- regulatory and financial reporting systems that can be harder for outsiders to navigate.

Also, China companies in some cases "have absolutely no clue of what they are buying, but they have to buy," said Chan. "It looks like a recycling of what happened 20 years ago to the Japanese. Hopefully Chinese companies could learn from them and minimize the mistakes. But I’m sure they will walk through that cycle once again."

— With assistance by Keith Zhai, and David Roman

Trump could be right about US exceptionalism - New York Magazine

It is possible to agree some things Donald Trump has said and think that he is an authoritarian demagogue who represents the worst of our nation’s impulses. In fact, it’s pretty much impossible for anyone not to agree with something Trump has said — the GOP nominee has been on both sides of nearly every major issue in American politics (and quite a few minor ones). Everyone from Noam Chomsky to Dick Cheney can find something worth seconding in Trump’s back catalogue of political musings.

This point might seem obvious to you. If so, then you are not Daily Beast columnist Jamie Kirchick.

On Monday, Kirchick wrote a piece titled “Beware the Hillary Clinton-Loathing, Donald Trump-Loving Useful Idiots of the Left.” In the column, Kirchick observes that Donald Trump once said that he was uncomfortable with the idea of American exceptionalism — and (gasp) many left-wing thinkers agree! Thus, Kirchick reasons, all left-wing critics of American foreign policy must be “Trump fans” who are recklessly “validating” a “reactionary.” That may sound like a caricature of his argument, but the cartoonishness is Kirchick’s own. After (justifiably) mocking leftists who believe Trump’s election might usefully “heighten the contradictions,” Kirchick writes:

But it is the second group of progressive Trump fans, subtler in their sympathies, who warrant the most concern. These are the so-called anti-imperialists who harbor deep revulsion at the idea of American power being used for good in the world. America, they believe, is more often than not a source of evil and disorder—a jaundiced view of our global role that they share with the Republican nominee …

“Trump is right, we are flawed messengers,” declared radical left-wing Brooklyn College political science professor Corey Robin in reaction to Trump’s Times interview. As evidence, Robin cited a United Nations hearing on American police brutality, where delegates from human rights luminaries like Pakistan, Russia, China, and Turkey denounced Uncle Sam. “No matter the DC freakout over Trump NYT interview, think his tacit repudiation of US exceptionalism is praiseworthy,” echoed Washington Post blogger Ishaan Tharoor … 

… Unlike other candidates for the presidency, war and aggression will not be my first instinct,” Trump declared in his first foreign policy address back in April. 

Such words are music to the ears of those on the left who paint Hillary Clinton as a “warmonger” for her mainstream foreign policy views and traditional support for the American-led liberal world order. 

The only alternative to Trump’s frothy isolationism is Clinton’s liberal hawkishness,” sighs The New Republic’s Jeet Heer. Writing for The Electronic Intifada, whose worldview is exactly what it sounds like, Rania Khalek concludes that “Clinton is also dangerous to world stability. And unlike Trump, she has the blood on her hands to prove it.” Though Khalek admits that “Trump is riling up fascist sentiments,” she says that “he’s doing so by tapping into legitimate anger at the negative consequences of trickle-down neoliberal economics driven by establishment politicians likeClinton.”

It’s worth noting that all of the thinkers Kirchick cites in these passages have publicly denounced Trump, and many have indicated a preference to see Hillary Clinton elected in November. It’s also worth noting that Kirchick has expressed public opposition to the Iran deal during this campaign cycle — a jaundiced view of American diplomacy that he shares with the Republican nominee. In fact, the foreign-policy speech Trump delivered on Monday was far more consistent with Kirchick’s stated views than with those of the left-wingers he casts as closet Trumpists. Does the fact that Kirchick agrees with Trump that withdrawing U.S. troops from Iraq was a disastrous mistake mean that Kirchick is a Trump “admirer”? What about the fact that he, like Trump, is a raging hypocrite?

China's deficit is not 1.8 but 10 percent - Economist

If a country's fiscal deficit hit 10% of GDP five years running, you might reasonably conclude that its public finances were parlous. So it is understandable that China has bristled at suggestions that it is veering into such territory. Officially, China is a paragon of fiscal rectitude: its annual deficits have averaged just 1.8% in the past half-decade. But the IMF, Goldman Sachs and others have come up with “augmented” estimates of nearer to a tenth of GDP, more than five times the official number.

At face value, these estimates imply that China is suffering from a budget gap—not to mention a credibility gap—of Greek proportions. Are things really that bad? Almost certainly not. The augmented figures form a clearer picture of China’s fiscal health. But they also differ from conventional measures in important ways, and so are potentially misleading.

The IMF devised the alternative concept a few years ago, to track the vast amount of spending that occurs off China’s public balance-sheet. Because the central government places tight limits on local-government debts, provinces and cities have long used arm’s length companies, known as local-government financing vehicles (LGFVs), to borrow from banks and issue bonds. That these are really just stand-ins for public borrowing is an open secret. The augmented deficit is a way of making this explicit. Consider the projections for 2016: the government is on course for an official deficit of roughly 3% of GDP. But adding in LGFV borrowing, the IMF forecasts that it will rise to 8.4%.

The augmented estimates also catch other forms of quasi-fiscal spending. Over the past year the authorities have made liberal use of China Development Bank, a “policy bank” specifically charged with supporting government initiatives. Land sales are also an important source of funding. Totting up all the different items, the IMF says China’s augmented deficit will rise to a jaw-dropping 10.1% of GDP in 2016 (see chart). The government is thus giving the economy a fiscal push more than triple the size of its official target.

Although that stimulus may be welcome now, an obvious question is whether public debt is far greater than advertised. Repeated fiscal blow-outs—declared or not—will eventually appear on the balance-sheet. Sure enough, the Chinese government tacitly confirmed the augmented estimates, at least in part, when it added off-balance-sheet debts to its official tally a couple of years ago. Its debt jumped to 38.5% of GDP in 2014 from 15.9% in 2013.

But the augmented deficit is not as frightening as it looks—and certainly not as worrisome as China’s vast corporate debts. First, it does not represent new hidden debt: it is an attempt to assign responsibility, putting the government on the hook for implicit liabilities. Second, spending funded by land sales does not add to debt. Sales must be handled prudently—once an asset is sold, it’s gone—but they are like a development bonus, topping up the coffers so long as urbanisation continues.

Finally, China’s deficit is different from those of developed economies. Outlays on social programmes, though rising, are still low. Much of the deficit stems instead from investment in roads, railways and so forth. “These are not just general spending,” says Helen Qiao, an economist with Bank of America Merrill Lynch. “They generate assets for the government.” So long as the assets are decent, net debt will remain under control, allowing China slowly to rein in its deficits. Indeed, the IMF expects the augmented deficit to average 9% until 2021.

fact be more like those elsewhere. At around a tenth of GDP, social spending is half of what it is in rich countries. And with China’s population about to age rapidly, the gaps in pension, welfare and health-care systems will soon get much wider without more public money. A strong state backstop would also give people confidence to spend more, supporting the economy’s rebalancing towards consumption. So while China can afford to tame its deficit gradually, it must be quicker to shift its spending habits. More should go on hospitals and pensions, less on power stations.

How one dairy company controls the world market ? - Bloomberg

In the shadow of a snow-dusted volcano on a corner of New Zealand’s North Island, a sprawling expanse of stainless steel vats, chimneys and giant warehouses stands as a totem of the tiny nation’s dominance in the global dairy trade.

The Whareroa factory was until recently the largest of its kind, churning out enough milk powder, cheese and cream to fill more than three Olympic-sized swimming pools a week. The plant has helped make owner Fonterra Cooperative Group Ltd. the world’s top dairy exporter and its farmer-suppliers among the greatest beneficiaries of China’s emerging thirst for milk. Now, faced with reduced Chinese demand that’s eroded milk prices and helped drag 80 percent of New Zealand’s dairy farmers into the red, the 44-year-old factory has come to symbolize Fonterra’s struggle to climb the value chain.

Fonterra’s Whareroa factory

  

Photographer: Brendon O’Hagan/Bloomberg

While a global shift toward more natural foods has spurred even Coca-Cola Co. to develop new milk products, Fonterra’s business remains largely wedded to commodities traded on often-volatile international markets. That’s frustrated the ranks of the cooperative’s 10,500 farmer-shareholders, who are set to receive the lowest return in nine years for the milking season just ended, and turned Fonterra’s strategy into the subject of national debate.

“Fonterra hasn’t taken the opportunity to put itself in a position to really weather these storms as well as they should be able to,” said Harry Bayliss, 63, a former Fonterra director who still supplies the cooperative from farms about 30 kilometers (19 miles) west of the Whareroa factory. “What the board has focused on in the last 10 years haven’t been areas that have created real ongoing value for the shareholders or the company.”

‘Nokia Down Under’

Auckland-based Fonterra has responded by selling assets, cutting jobs and closing a factory to improve efficiency and strengthen its balance sheet.

“We have confidence in the long-term fundamentals of dairy, and we remain focused on securing the best possible returns for our farmers by converting their milk into high-value products for consumers around the world,” Chief Executive Officer Theo Spierings said in a statement Thursday that announced a 10 New Zealand-cent dividend payment and reiterated a forecast for improved earnings.

Forged in 2001 from the merger of New Zealand’s two largest dairy companies and the agency that controlled the nation’s dairy exports, Fonterra was promoted as a means of creating critical mass for Kiwi farmers. A kind of Nokia Down Under, it was to drive innovation and thrust the country onto the world stage by taking on the likes of Nestle SA and Kraft Foods Group Inc.

Yet, even with a near-monopoly over New Zealand’s milk output and an empire spanning Australia, the Americas and China, Fonterra is more likely to supply those companies than compete with them on supermarket shelves.

“The idea was to move New Zealand’s dairy industry up the value chain, and push hard to become a global brands company,” said Oyvinn Rimer, a research analyst at Harbour Asset Management Ltd. in Wellington, who has tracked the cooperative for about five years. “It just has not happened.”

Every six hours, a train pulls in to the Whareroa factory, near Mount Taranaki in the small town of Hawera, to pick up five containers of Fonterra product -- milk powder makes up almost half.

The commodity, with a six-month shelf life, has been New Zealand’s core farm export for more than 20 years. In fact, the South Pacific nation supplies about two-thirds of the whole milk powder traded internationally. 

Powder Keg

“The problem is we put all our eggs, or nearly all our eggs, in that whole milk powder basket,” said Keith Woodford, an honorary professor of agri-food systems at New Zealand’s Lincoln University, who has followed Fonterra since its formation. “We locked ourselves into this one product and Fonterra lacks the capital at hand to now change direction quickly.”

Prices for whole milk powder, an ingredient in everything from cookies to ice cream, have dropped by half over the past three years as purchases by China, the biggest buyer, dwindled amid a glut in global dairy supplies. That dragged down the fortunes of export-dependent dairy farmers worldwide, but especially in New Zealand, where they rely on China and other major markets to buy about 95 percent of their output.

“In my 35 years of farming, this is by far the worst downturn that we’ve been in,” said Phil Nixon, 59, a second-generation farmer whose 350-cow herd supplies the Whareroa factory. While Nixon is “very, very passionate” about Fonterra, he says the cooperative has been a frequent source of frustration. “I’m damn sure that with everything efficient, they could return us more than what they have,” Nixon said.

Milk payments to farmers dropped to an estimated NZ$3.90 ($2.80) a kilogram of milk solids for the year ended May 31, half the record NZ$8.40/kg paid two years earlier. While the current season’s price is predicted to increase to NZ$4.25/kg, at that level it will still be about 20 percent below what farmers need to cover their costs. Whole milk powder at Fonterra’s GlobalDairyTrade auction this week jumped 19 percent, but at $2,695 a metric ton is still 17 percent below its average price over the past five years.

S&P Global Ratings downgraded Fonterra to A- in October, four rungs above junk, citing its “peak capital expenditure,” as well as global market volatility. Capex exceeded operating cash flow by NZ$948 million in the year ended July 31, 2015, as dairy prices plummeted.

Earnings are forecast to improve as the milk glut abates, reaching 50-to-60 New Zealand cents a share in the current financial year, Fonterra said in an Aug. 1 statement, from an estimated 45-to-55 cents a year earlier. This shows the company is making “good progress in continuing to increase value through our consumer and foodservice businesses,” CEO Spierings said at the time.

The relatively wide earnings range indicates Fonterra remains sensitive to commodity-price variability, said Arie Dekker, head of institutional research at First NZ Capital Securities Ltd. in Auckland, in a report. “Ultimately, investors are looking for more consistent results.”

Shedding Suppliers

Farmers, too, want more. Some sold their equity in the cooperative and switched to supplying competitors. Fonterra’s share of New Zealand’s milk supply has dropped to 84 percent from more than 95 percent in 2001, according to Wellington-based Infometrics Ltd.

A dairy farm that supplies Fonterra, near Mount Taranaki.

  

Photographer: Brendon O’Hagan/Bloomberg

Laws passed at Fonterra’s creation aimed at safeguarding competition in New Zealand’s dairy industry compel the cooperative to collect fresh milk from any farmer who wants to supply it. That guarantee has contributed to a quadrupling of the nation’s milk supply since 1984. Kiwi farms are forecast to produce about 22 billion liters (5.8 billion gallons) of milk this year -- almost four times the production of Ireland, which has a similar climate and population size, according to KPMG.

‘Huge Wave’

Collecting this “huge wave of milk,” as Fonterra director David MacLeod calls it, has become less economic as a 22 percent increase in land used for dairy farming in New Zealand since 2008 forces the cooperative to travel further from its factories to pick up supplies. The legislation, which also requires Fonterra to sell milk at regulated prices to smaller processors, is currently under review, with the government proposing that Fonterra no longer be obliged to collect output from dairy startups.

“It will give us more options,” said Rob Spurway, Fonterra’s chief operating officer for global operations, in an interview. “We can invest more in the value-add areas in the business rather than simply coping with large volumes of milk.”

As it is, Fonterra creates less value from raw milk than Danone SA, Nestle and the majority of its global competitors, according to estimates compiled by the International Farm Comparison Network this year.

“Danone and Nestle, they just buy milk as they require,” CEO Spierings said in an interview at one of Fonterra’s cheese plants in June. “We are a cooperative, we have to take all the milk. We have to take it in and we have to create value off everything -- we will never be the same.”

Geography is a challenge, too. While New Zealand has a temperate climate and abundant rainfall, making it ideal for dairying, it’s 2,500 kilometers from Australia, its closest major market. Going abroad hasn’t been without difficulty either.

In Australia, where Fonterra is facing a backlash from its farmer-suppliers over milk-price cuts, it is selling its loss-making yogurt and dairy desserts brands to the local unit of Italy’s Parmalat SpA, after shedding a 9 percent stake in Bega Cheese Ltd. in October. 

A key part of Fonterra’s current strategy is to expand supply to 30 billion liters by 2025 in as many as six so-called global milk pools. That includes China, where the company has two farming hubs that posted a NZ$29 million first-half loss before interest and taxes. 

Fonterra is now counting on an investment in Beingmate Baby & Child Food Co Ltd. -- which has about 7 percent of China’s baby food market -- as a salve for the collapse of its former partner Sanlu Group amid a food scandal involving melamine-tainted infant formula in 2008.

Some farmers are wary of developing an over-dependence on China.

China’s consumers “are great for New Zealand -- they’re great for the world,” said Dave Ellis, whose farm in South Canterbury on the South Island is one of Fonterra’s biggest suppliers. “But we’ve gotten very reliant on them.”

The broader issue for Fonterra, said Ian Proudfoot, global head of agribusiness for KPMG in Auckland, is the need to extract more from its milk.

“Having a strong position in an important sector like dairy is valuable to New Zealand,” he said. “The challenge for us, though, is we’ve got to ensure that’s a high-value position and we’re not just sweat-shopping out low-value commodities.”