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Milk powder price slides further 3% to record low in Fonterra auction (Update 1)
July 2nd, 2009The average wholesale milk powder price settled in the overnight auction for July on Fonterra’s Global Dairy Trade online trading platform was US$1,829 a tonne, which was down 3% from June and below the record low of US$1,851/tonne set in February when prices crashed. (Adds Fonterra comments from news release later in the morning)
US Department of Agriculture figures show wholesale milk powder prices on international markets have not been this low since at least 2004.
Fonterra forecast a NZ$4.55/kg payout for the current 2009/10 year in May when the wholesale milk powder price was over US$2,100 a tonne and the currency was forecast to be around 59 USc. Since then the wholesale price has fallen a further 15% and the currency has strengthened 8% to 64 USc, suggesting an eventual payout closer to or even below NZ$4/kg if prices stay this low and the currency stays strong for the rest of the season.
Given the size of the dairy sector’s contribution to the economy, this has the potential to lengthen and deepen the recession, drive dairy land prices lower and depress regional areas such as Waikato, Taranaki, South Canterbury and Southland that depend on the dairy payout for a large chunk of economic activity. Also, this will further pressure newly converted large dairy farms struggling under heavy debts.
Moody’s has warned that banks in New Zealand face challenges because of the strong lending to new dairy farms in recent years.
Fonterra said there had been good customer interest in the auction, but there was continued caution about pricing.
“We saw increased customer demand, but they remain wary about paying too much in an uncertain environment. Consequently they are taking a conservative approach with their purchasing as they try to second guess when the inevitable increase in demand, and consequently prices, will occur,” said Kelvin Wickham, Managing Director of Fonterra GlobalTrade.
“Today’s result reflects that the market is still in a rebalancing phase. On the one hand milk supply globally is declining sharply but on the other hand recessionary conditions mean consumers have reduced their purchases of dairy products. Right now our customers are attempting to predict exactly when decreasing supply or increasing consumer demand will result in an inevitable firming of prices.”
Tags: Dairying, Fonterra, Global Dairy Trade, USDA, Wholesale Milk Powder
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July 2nd, 2009 at 8:42 am
all these numbers just look like they are returning to norm if you look at the long term trends. maybe we just has a price bubble that inflated with the rest of the commodity speculation? Maybe scarily this is it for prices and we just need to adjust to these levels of payouts?
July 2nd, 2009 at 8:43 am
Bernard the extent of dairy over most of rural new zealand now, means the negative impact will be much more widespread now. Areas that were traditionally sheep and beef like the Hawkes Bay, King Country, West coast, Rangitikei, North Otago, Central Plateau, if they are not actually milking cows, then they will have some dairy grazing component in their system. It may be growing crops as supplementary feed for dairying.
Dairying has had a positive effect on pricing of sheep and beef farms and cropping properties. But not now. As these factors have come into play, the markets of the likes of Tauranga will feel the bite, as less cash rich retiring farmers (of any variety) head to town.
As I discussed in another thread, sharemilkers have been encouraged to buy urban property as a tax shelter. Maybe some of those holdings will be let go.
The implications of a 2nd year of negative returns for this massive NZ industry, will be very widely felt.
I would imagine the large component of businesses that have sprung up to handle the excess money that sloshed around from dairy conversion will fold.
And let me be clear, this money was not from profit. It was borrowed.
A good friend of mine who took part in some of the work on the forest to farm conversions, kept saying to me ” how in hell they will drag enough milk out of the old biddies to ever pay for this is beyond me”.
July 2nd, 2009 at 8:54 am
Neil, when the payout sky rocketed, so did costs. However costs havent really come back to earth. So average payout, but below average profit.
The scary part, I learnt that we will never become rich from farming. Costs will always drag us down. The only way is through dealing land. And you need the luck of the Irish and a bold nerve for that.
Many farmers out there right now are finding they should have stuck to farming and not dealt in land.
July 2nd, 2009 at 9:05 am
Wiliam – “The scary part, I learnt that we will never become rich from farming. Costs will always drag us down. The only way is through dealing land. And you need the luck of the Irish and a bold nerve for that.” See answers for that here:
http://www.interest.co.nz/ratesblog/index.php/2009/06/26/bernard-hickey-talks-to-alison-mau-on-tvnzs-breakfast-the-looming-clash-of-the-generations/#comment-27505
July 2nd, 2009 at 9:34 am
The big question is ‘whats fonterra’s cost of production’? It must be getting close to break even on milk powder. So every %3 drop in prices is having a huge impact on payout. Some are now talking of milk powder earning under $3 a kg to the farmer.
Its time we talked about the huge profits being made in our local market. Charging $19 a milk solid for fresh milk is overboard when one considers that in Germany fresh whole Organic milk is $1 a liter NZ.(nz eqv $1.61 a liter)
PeterR and several other have seen this coming from way out. Its a classic bubble and bust thinking thats found all over NZ. Its in Forestry where we now produce Balsa wood,Kiwi Fruit where we go BOOM Bust every few Years,Housing,Farm prices,Dairy,Apples,Grapes,Councils and so on. Our thinking is flawed, lets discuss this,its an obvious problem and it starts at the top. Its going to destroy us if it continues.
July 2nd, 2009 at 9:42 am
Doug put it well when he posted on blog “Bill English: Getting debt under control part of creating jobs”
July 2nd, 2009 at 6:38 am
“…While here, we elect a forex trader to oversee the province of New Zealand whose economy is being orchestrated by a minion who, with eyes closed, sounds more like Helen Clark (albeit with a higher voice) with each passing parliamentary session.
Perhaps we are, all of us, just on the sidelines waiting for someone else to do something, when, in reality, there is nobody.”
July 2nd, 2009 at 10:07 am
Andrewj.
At USD 1,840 per tonne, WMP is paying about NZD $4.30 gross per Kg of milk solids. Off that you need to take all of Fonterra’s operating costs including milk collection, drying, storage and transport to shipping. That does not include overheads.
Fonterra’s total costs work out between $6.00 and $8.00 per Kg for the quantity of milk solids processed.
At current WMP prices – on a marginal basis – every extra Kg of milk solids produced in NZ is dragging the average payout towards $3.00 per Kg MS. At the same time the marginal cost of that production on farm is likely to be in excess of $5.00 per Kg MS.
There is an obvious and smart response to current world dairy commodity prices, but the advice being given to dairy farmers by Fonterra/industry advisors remains to produce more milk (but cut costs). Stupid in the extreme, but it does accurately reflect the thinking and the quality of dairy industry leadership.
July 2nd, 2009 at 10:47 am
Listen to the radio today, or check out the front page of your newspaper, and what is the lead feature : the foreshore & sea-bed issue. Now, I thought this had been settled by Labour, in 2004. And I thought it was of no significance, given the current economic crisis. Fonterrible’s woes ought to be the real issue. So why are the Nats running with something of no immediate consequence to our economy. It took the Labour Gumnut 3 terms to fully lose contact with the important issues, and to hive off into lightbulbs and shower-heads. National are in dreamy dreamy land in their first term. Pity !
July 2nd, 2009 at 10:51 am
The NBR reckon Fonterra have been dumping milk powder on to the Chinese market:
http://www.nbr.co.nz/article/fonterras-globaldairytrade-down-and-messy-104597
I recall various bloggers here suggesting that was the case weeks and weeks ago – yet again the blogosphere gets to the nitty gritty first!
Also – Perfect Storm (debtwise) for farmers:
http://www.nbr.co.nz/article/debt-a-factor-perfect-storm-faced-farmers-104585
July 2nd, 2009 at 11:56 am
From the NBR article. The message is there: reduce production.
Maybe take a 9 day fortnight?
“Quite simply, there isn’t enough demand out there to take Fonterra’s milk, let along the subsidised produce coming out of the overproducing US and EU markets.”
July 2nd, 2009 at 12:10 pm
This is further bad news for the big 4 banks with already huge rural loan books, and a coming wave of impairments just getting started, not yet having fully washed over us. Yikes !!!!
July 2nd, 2009 at 12:27 pm
Payout will exceed $4.55. Supply shortage will force up price.
July 2nd, 2009 at 12:30 pm
Is it really that bad for the banks? Unless there is wholesale collapse of farm prices and a large portion of their loans become delinquent, the banks continue to reap the interest payments. If their actual bad debts are greater than the interest received, then it is bad news for them.
Anyone seen the movie “The International”? All about a big bank getting control of governments and countries so they can provide (and control) lending. At the risk of sounding like Iain Parker, it is very plausible.
July 2nd, 2009 at 12:31 pm
This may not be the right blogsite to raise this question, but here goes–
With all the Home Insulation and Save the Environment furor, why is the Gummit supporting Fletchers fibreglass batts and not promoting WOOL?
July 2nd, 2009 at 12:38 pm
Can you shove wool down your wall ?
July 2nd, 2009 at 12:42 pm
Roger – check this:
http://www.woolbloc.co.nz/
From the photo, you just stick the sheep in your ceiling!
July 2nd, 2009 at 1:01 pm
Can they be stuck to the ceiling?
July 2nd, 2009 at 1:05 pm
Wool is cheap at present but we are in it for the money so as soon as you need it,we need to treble the price. Its just business you understand.
July 2nd, 2009 at 1:09 pm
yes you can shove wool down your wall Roger, it’s just more expensive then batts
July 2nd, 2009 at 1:35 pm
Use straw Roger. Rip off the old Gib. Shove the bales in tight and wire to the studs. Pack straw tightly in the gaps and Re-run new wiring. Then plaster the inside with a lime mix not cement. Then paint if you want. You get a smaller room but fantastic insulation. Best of all ,you don’t need a permit and no council fingers in your wallet. For smaller window areas, have polystyrene 2 inch thick blanks cut to fit the frames. A bit fiddly to fit if too tight and better lose with a fabric strip on the window ledge. Just put in place when it turns dark. You can even shove the bales of straw into the ceiling space. Break them down and pack the space out. Cover the whole lot in a foil sheeting and throw some rat bait on top. Mind you check the wiring is OK first.
July 2nd, 2009 at 1:40 pm
Fonterra is reshuffling the deck, oops the deck chairs on the titanic. Barry Harris a goner, Mr Wickham looks to be shifted sideways.
July 2nd, 2009 at 2:06 pm
Trev : Do sheep get along with rats ? We have “Norwegian Black” rats in our ceiling, according to the guy from ECan’s bankrupt Target Pest. We got some snooty neighbours, so I guess that’s why the rats are pedigree. Gonna get noisy with flocking sheep up there, too.
wally : The wiring is buggered. Even pedigree rats gotta eat something.
July 2nd, 2009 at 2:34 pm
Roger – perhaps the sheep can be trained to manage the rats – or vice versa.
I saw a piece on the BBC the other night about Norway. They have used their oil wealth wisely and as a result they are very well off. Apparently they invested in the right things – education etc, and have not been affected by the crisis.
Maybe we could swap some of our government for some of theirs? We’d probably get more rats.
July 2nd, 2009 at 2:41 pm
They love the plastic Roger. If you have high ceilings, do a rewire when fitting a lower false ceilings. Sling a dozen of those rat killer baits in the ceiling space or get a pet snake. The straw bales are the best and cheapest insulation you can get. The task is to do the job without having council fingers in wallet. The best stuff under the floorboards is the polyS foam blocks already cut for a close fit. Shove the wife under the house and poke the sheets through to her to fit. Tell her women are better at such fiddly work. Keep up a steady flow of encouraging comments.
July 2nd, 2009 at 2:48 pm
Wally – lol. Tell her not to staple any electrical cables as well.
July 2nd, 2009 at 2:55 pm
Trev, because banks are unlikley to recover that money, so the assets have to be written down as an expense. Add that to already falling net interest income and non-interest income, and you end up with far lower profit. It wouldn’t take much of a rise in the percentages of impairments (currently just under 1% of assets for most banks) to tip the balance to negative bank profits..
July 2nd, 2009 at 3:01 pm
wally : she’s a Filippina. They do what they’re told. Just ask any Southland dairy farmer for the veracity of that. (Thanks for the advice !)
July 2nd, 2009 at 4:25 pm
Too right Roger, where would the NZ dairy industry be without the hard workers from the Philippines.
July 2nd, 2009 at 8:48 pm
Back in time,look at these guy’s arrogance.
http://www.nbr.co.nz/article/private-bin-fonterra-media-relations-101-90278
July 2nd, 2009 at 9:51 pm
I went looking on Fonterra’s site for the document I referenced in this comment:
http://www.interest.co.nz/ratesblog/index.php/2009/06/19/big-problems-with-big-dairy-herds-tell-us-what-youve-heard-or-seen/#comment-27154
and it was no longer available.
The interesting bit was probably this:
FONTERRA’S FORECAST FOR SEASON ENDING 31 MAY 2010
Clauses 16(4) Dairy Industry Restructuring (Raw Milk) Regulations 2001
As at 1 June 2009, Fonterra’s forecast information as required under clause 16(4) of the Dairy Industry Restructuring (Raw Milk) Regulations 2001:
Fair Value Shares: The fair value share price for 2009/2010 season is $4.52 per share. The fair value share price multiplied by the total number of shares on issue at 1 June 2009 is $5,703 million.
Peak Notes: The number of Peak Notes is zero
Cost of Capital: Fonterra’s Cost of Capital for the 2009/2010 season is 11.75%
Boring apart from the cost of capital. The document is still there, just without links to it, but can be accessed from my comment referenced above.
July 3rd, 2009 at 12:01 pm
Does 11.75% suggest high risk? Accounting was a low point in my schooling. Have things about faced. I used to pay higher mortgage rates because I was borrowing small, I have noticed I have been offered much better rates lately, and heard rumour in comparison, the more you borrow, the (much) higher the rate??
July 3rd, 2009 at 12:12 pm
William, it’s probably a keyboard error. I would think 17.15% is the right figure. Even at that I wouldn’t lend them a peso with bollard stuck to it.