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Fonterra lifts its forecast farmgate milk price by 25 cents to NZ$5.50 per kilogram of milk solids

Posted in Rural News

Fonterra Co-operative Group has announced a revised payout forecast range for the 2012/13 season of $5.90 - $6.00 before retentions for a fully shared up farmer, 25 cents up on the previous forecast range.

See Fonterra's statement below:

The Fonterra Board announced:

· a higher forecast Farmgate Milk Price of $5.50 per kilogram of milksolids for the 2012/13 season, up from $5.25 on the previous forecast; and

· a forecast Net Profit after Tax range of 40-50 cents per share, consistent with the recent Fonterra Shareholders’ Fund Offer prospectus;

· a 40 cent increase in advance rate payments to farmers.

Fonterra is required to consider its Farmgate Milk Price every quarter as a condition of the Dairy Industry Restructuring Act (DIRA).

Fonterra Chairman Sir Henry van der Heyden said after considering farmer shareholders’ cash flow requirements, and the strength of the Co-operative’s balance sheet after the launch of Trading Among Farmers, the Board had also decided to lift advance rate payments to farmer shareholders.

“The immediate effect of this decision is that our farmers will have more money flowing into their bank accounts from late January when they are paid for the previous month, and that will help them with their cashflows.

“Between 1 August and the most recent GlobalDairyTrade (GDT) trading event, prices have increased by an average 17.7 per cent. While there was a drop at last week’s GDT event, it has not changed our overall commodity price forecasts.”

Chief Executive Theo Spierings said Fonterra’s strong balance sheet meant that from a cash flow point of view the Co-operative was in a position to increase payments to farmers over the next few months without any significant risk to its financial stability.

Mr Spierings said while the outlook for any movements in the New Zealand dollar exchange rate were neutral, the impact of weather events in other markets were likely to support the lift in forecast Farmgate Milk Price.

“There has been a persistent, serious drought in the United States. That has pushed up the price of grain, which in turn affects dairy production. There are also concerns about drought in the Ukraine and Russia. In South America, extreme wetness in parts of Brazil and Argentina could also depress wheat production,” Mr Spierings said.

“Given current global conditions, our forecasting anticipates global dairy prices are likely to move higher in the first half of 2013.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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10 Comments

A quick look at gDT figures

A quick look at gDT figures suggest that over the 3 months since the last forecast average winning prices are up between 1% and 4% in USD depending on which auctions you compare. The NZD:USD exchange rate is almost identical.
 
Fonterra now has cash - will payout.

Great news and much needed by

Great news and much needed by our country
Scenario:
Milk price goes to $8/kg for several years, farmers borrow more money as land price goes up.......then payout falls to $6 in 2016 when world production recovers. Shit hits the fan and we're worse off!
Advice: Payoff debt when payout high is a great investment, and spend money on maintenance/pasture renewal/ drainage/ new cowsheds etc........not more land......duh
 

Just wondering where all the

Just wondering where all the Fonterra knockers are right now - you know who you are...
 
Good news although very predictable. It has been cyclical since Adam was a boy and is going to continue to be so - probably even more as systems are intensified off shore and the weather dictating feed supply. Puts a temperate climate into such long term competitive advantage it ain't funny...

  Im watching, as Colin Riden

 
Im watching, as Colin Riden said Fonterra got a bit of cash.
 

Pretty small news really

Pretty small news really itys, so what it goes up 25c, the beef and lamb schedules change by bigger percentages dam near every month.

Right here ITYS, and I'll

Right here ITYS, and I'll still be here when the pig's lipstick wears off, ...why ,  did the  cow jump over the moon...?
50cents whoohoo!, at those increments it'll take  a while before $8.00 is up again, and isn't that where the upgrade investment all went hog wild...
Don't get the pom poms out just yet......just a bit of share bait.

So is the payout increase a

So is the payout increase a result of a superior co-operative model backed by by able leadership, or a drought in the USA? Are droughts in the US going to be what drive these predictable cycles? Is being part of a hybridised cooperative/corporate going to provide any advantage in managing this type of commodity cycle?

As you said ITYS farming is

As you said ITYS farming is cyclical,  It is good news.  The question is- is it sustainable?  Bankers I have been talking to recently believed that $5.25 was optimistic.
 
The interesting thing I have found with this announcement is in talking to farmers, a number of them are saying - yeah, but will they take some off us later.  We won't be spending it.  The comment in the release that they anticipate an increase in early 2013 is what has got some farmers jumpy. 
 
The credibility of directors seems to have taken a hit lately.  Then again I hear some won't be seeking re-election when their term comes up in the next year or so, so are we in fact just seeing some directors marking time till they can move on to greener pastures?

It seems MPI were a little

It seems MPI were a little too bullish regards dairy in their 2012 Situation and Outlook, and the December update is now backtracking a little on the exchange rate. No mention is made of the NZD:USD forecast at 0.65 for 2016.
 
The Treasury exchange rate assumptions used for our updated forecasts is an average NZD/USD cross rate of 0.807 over the period December 2012 quarter to June 2014 quarter.
 
 
EXPORTS
New Zealand’s dairy export revenue is expected to fall by 8.1 percent to $12.6 billion in the year to 30 June 2013 (compared with the previous year); this is slightly below the June forecast.

 
PRICES
International dairy prices have recovered 24 percent from their recent low in May 2012. This rapid recovery was due to market expectations of a reduction in milk supply from the EU and US. A slow-down in the growth of international milk production is expected to support the continued recovery of international dairy prices in the 2012/13 dairy season and beyond.

 
In particular, international milk production is forecast to expand at a much slower rate in 2012/13 than in the previous year. High feed costs caused by the US drought have already had a negative impact on milk production in the US, where production fell 0.5 percent in September 2012 compared to the same month in 2011. High feed costs also impacted on milk production in the EU, where production was down 2.5 percent in July 2012 relative to July 2011.

However, economic uncertainty in the developed world and weaker demand growth from emerging markets are likely to constrain future increases in international dairy prices. Demand growth for dairy products slowed during 2011/12 and a rebound is unlikely to happen in 2012/13 due to the subdued global economic outlook.

The domestic farm gate milk price for year ending 31 May 2013 is expected to average $5.54 per kilogram of milksolids, down 42 cents on last season’s price, due to the stronger NZD eroding the expected gain in international prices.
 
That being at "an average NZD/USD cross rate of 0.807 over the period December 2012 quarter to June 2014 quarter".
 
http://www.mpi.govt.nz/news-resources/publications

ITYS. It is no coincidence

ITYS. It is no coincidence that this payout increase closely follows Fontera's "share" issue, they have again used Capital as Income (see Prof. Robb's analysis). The tension, betwixt the farmer co op memberships' rapacious demands for money (mostly due to debt servicing) and the prudent corporate financial structure of fontera, remains. Now though they are shoveling out someone else's money!
Ergophobia