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Milk powder auction price falls 12% in June to near February low
The average whole milk powder price fell 12% from May in Fonterra's latest Internet auction and almost hit February's low since the auctions began in July last year. The average price for all products sold at the auction was US$1,886/tonne, compared to US$1,851/tonne in February. This latest drop followed a 4.1% drop in the average price in May.
"Today's result indicates lower demand for the longer-term contracts, and confirms our view that international dairy markets will remain weak until consumer demand improves," Managing Director of Fonterra GlobalTrade Kelvin Wickham said.
"We need a sustained pick-up in customer and consumer demand to see any meaningful recovery in prices and that is not occurring as fast as we would like. And there's increased uncertainty in the market because of the recent announcement of US subsidies and talk of European retaliation," Wickham said.
The weighted average price for longer term-contracts, to be shipped from New Zealand ports between December 2009 and February 2010, fell to its lowest price since the auctions began, down 59% from July (and 14% from May) to US$1,814/tonne in June.
This latest result dashes Fonterra's hopes in April the market might be recovering and will put further downwards pressure on the likely payout for 2009/10, which was forecast last week at NZ$4.55/kg. That was before this latest poor auction and the currency's rise over 65 USc. The current payout forecast assumes a currency at 59 USc. Dairy farmers in New Zealand are angry that the United States announced plans last month to subsidise its exports, responding to similar subsidies announced by the European Union.
The average price for medium term contracts (to be shipped between September and November 2009) fell 12% from May to US$1,894/tonne. This was up slightly from February's low of US$1,860/tonne, and 57% down from July.
The average price for shorter term contracts (shipment in August) fell 8% from last month to US$2,002. This was 54% down from July prices.
Despite the fall in prices, the volume of whole milk powder traded through the auction rose to 18,000 tonnes, its highest since December.
I'm sure I saw on
I'm sure I saw on a blog here somewhere, someone predicting this and estimating the payout dropping to mid-$3's.
Alex/Bernard - is there anyway you can compute to what level the payout may now fall?
Next question might be, what does all this mean for NZ Inc.?
Hi Les, rather busy at
Hi Les, rather busy at mo, but note this comment from van der Hayden
"But as a rule of thumb a 1 cent movement in the exchange rate realised over a year has an impact of about +/- 10 cents per kgMS in the Milk Price, with everything else being equal,"
http://www.interest.co.nz/ratesblog/index.php/2009/05/27/fonterra-slashe...
Cheers
Alex
PS and you could start calling it NZ (red) Inc :)
It's always too good to
It's always too good to last...are the shoots still green ??
"We need a sustained pick-up in customer and consumer demand " that's like saying we need oxygen to survive.
Meanwhile the NZ$ is going to the moon, and the only viable and productive sector of our economy is getting trashed by the exchange rate, while the indulgent import/consumption sector gets another dose of adrenaline....RBNZ fiddling while the country burns ??
Alex. These are USD prices,
Alex.
These are USD prices, so the drop is far worse in NZD. In NZD terms prices are down 18% on last month, and 21% from that February 2008 low point to which you refer.
Hi Guys, Back of fag
Hi Guys,
Back of fag packet calculation -
Milk price reduction - $4.55 - 12% = $4.00
Currency appreciation - $4.00 - (6 x 10c) = $3.40
Ouch! I think that would be just about every dairy farmer making a loss.
Neil.
Alex - thanks. So if
Alex - thanks.
So if we average 65c it could well fall to mid-$3, assuming other market dynamics remain the same.
I'm not a farmer, but from what I've seen in the blogs on this site that seems like more bad news, and your witisism may not be far from the truth - hopefully just ink though.
Blimmin heck, this is bad.
Blimmin heck, this is bad. One way or another my wider family (and myself with grazers) will be hit by this. From a daughter supplying OCC, to a sister working for fonterra, rellies working on construction sites of conversions, father with LIC, etc etc. I just hope the dollar reverses its trend, along with the auctions before the new season starts.
Neil, Les. Your guestimates are
Neil, Les.
Your guestimates are I suspect for gross revenue. Fonterra's gross margins are under 50% i.e. costs normally make up more than half of revenue. But costs are not based on revenue - they are effectively fixed.
If these prices and exchange rates were to persist for any length of time you would have a payout significantly less than $3.00.
Fonterra bond holders must be relieved that the credit rating given suggested that Fonterra could if need be just keep on reducing payout.
William. These prices are all
William.
These prices are all for next season - August 2009 through February 2010.
Les Rudd asked "Next question
Les Rudd asked "Next question might be, what does all this mean for NZ Inc.?" The answer is simple - the Government will bail out Fonterra and all dairy farmers.
PeterR has it right. Some
PeterR has it right. Some commentators do the sums as follows - say $1900/T US for WMP = approx $3000/T NZ @ 65c. Seems you get about 1.7kgWMP/kg MS so that = $5/kg gross. With costs around $2.50 mostly fixed = S2.50/kg MS net.
This is a very rough spot return, hopefully at lowest point. Fonterra is hedged, product is moving, costs are reducing, kiwi is falling etc etc. But a sobering set of numbers to kick off the season.
Andy R - let's hope
Andy R - let's hope it doesn't get that bad.
Thanks for other responses, useful.
How much has the stockpile
How much has the stockpile of milk powder decreased in value and what's the shelf life of the stockpile? 6 mths, 12 mths 18 mths and who will buy it?
milk powder....18 to 24 months,
milk powder....18 to 24 months, then sell to China:)