By Keith Woodford*
In recent weeks the short term dairy outlook has turned from bad to awful. Fonterra’s recently revised milksolids price estimate of $4.15 for the current 1015/16 season has already been overtaken by events, and is once again looking decidedly optimistic.
I now see a figure of about $3.90 as being more likely, but still with plus or minus 40c around that. Even more important, no longer can we ignore the likelihood that dairy prices are going to stay low for at least the first half of the 2016/17 dairy season, and possibly for all of that season.
Most but not all of the farmers I have contact with are going to come through relatively unscathed. But that is not the case for those who have both high costs of production and high debt. We are now facing a situation which New Zealand farmers have not faced since the 1980s.
The key issue is now survival. And the focus of farmers has to be on finding the right strategy the assist with their own individual situation. There is no one strategy that applies across all farms.
It is easy to blame others for the situation we are in. Increasingly, the bad guys are seen to be the European and American farmers who are supposedly subsidised, or the Chinese who are supposedly inconsistent in their buying behaviours. Well, we need to get over using others as the fall guys.
The reality is that European farmers get very substantial support for environmental protection measures but this support is decoupled from production and milk prices. More importantly, it is WTO-compliant and we have no leverage to change those policies. To the extent our leaders choose to bang the table on such issues, then it is essentially just grandstanding for our own local New Zealand constituency.
Similarly, the notion that American dairy farmers receive substantial subsidies is largely a myth. Once again, the US would seem to be WTO compliant in relation to dairy support. The key so-called subsidy is a disaster insurance program. Anything beyond disaster level insurance and farmers have to buy into it. Many of them have not done so given the cost thereof.
As for the Chinese, well, it would be nice if there was more transparency as to what is happening over there. But the bottom line is that apart from 2013/14 when China’s own industry was in turmoil from local shortages, and the subsequent import step-down when those issues were resolved, the overall pattern remains one of onwards and upwards.
If we want to find the most important causes for the downturn then we first have to look at global geo-politics. The Russian ban on dairy imports from Europe was in response to European and American financial sanctions and trade embargoes imposed on Russia as so-called punishment for events in Ukraine.
The major downturn in oil prices also links into global politics. It is just unfortunate that the oil producing countries tend to be the countries that purchase our whole milk powder. So currently they are out of the market.
Whereas both of these factors were unpredictable, there is a third key factor which some people did recognise as a possibility. This factor was and is that the removal of milk quotas in Europe would unleash entrepreneurial enthusiasm amongst some European farmers.
We all knew that production deregulation in Europe was coming, but there was no consensus as to what the market consequence would be. Well, now we know.
In the Netherlands, some farmers have figured out that their marginal costs are less than the marginal returns, and so they have increased production. Overall, milk production in the Netherlands is up 9% since quotas came off in April.
In Ireland, farmers also thought they saw economic opportunity and have increased their production a remarkable 16%. But in most other parts of northern Europe production is also up, including the big producing countries of Germany, France and the UK.
My estimate is that it will be at least April before European production stabilises on a same-month basis and also year-on-year basis. Whether we will see declines thereafter is debatable. Some farmers with low marginal costs will continue to increase their production while eventually some smaller farmers will decide to get out of dairy altogether. But the timing is unknown.
Currently we are still at a very early stage of major European dairy industry restructuring that the removal of quotas has unleashed. There is turmoil ahead for European dairy.
Here in New Zealand, our industry has always argued for deregulation of both the European and Canadian dairy industries in the naïve belief we would somehow benefit. Well, in Europe it is occurring and we are now reaping the bitter harvest thereof.
Looking beyond the European restructuring, the reality is that there are always going to be unexpected global events, some of which stimulate demand for commodities and some of which depress that demand. At the moment we are in a big trough.
What has been poorly understood in New Zealand is that whole milk powder and skim milk powder are the most volatile of all dairy products. Echoing that Longfellow nursery rhyme about the girl with the curl on her forehead, when milk powder is good it is very good indeed and when it is bad it is horrid.
Back in the days when I was lecturing at Lincoln, I always used to say to farm management students that some time in their career they would face a big downturn. This was regardless of whether they were producing milk, lamb or beef. Neither I nor anyone else could tell them when that would be, so it was a case of following the scout motto of ‘be prepared’. Of course that is easier said than done. In these matters, timing of major investments is crucial.
Given the situation we are now in, it is no good crying over spilled milk. For those who are in difficulty, the focus has to be on finding a path to survival.
The starting point is to recognise that it is the banks who will make the key decision as to who survives and who fails. So all farmers needs to be presenting their banks with their survival strategies. Banks need to see that there is indeed a plan.
It is not the banks job to produce that plan and they will not do so. The only decisions they will make are whether or not to provide ongoing finance.
Fortunately, it is not in banks’ own interest to put the squeeze on productive farmers, as they do not want their own asset protection values to fall. We all have to hope that the overseas-based CEOs and governance boards of our major banks will, in that regard, get it right.
The second point is that cash is king. What does a specific reduction in cost do to income? Most farmers have already made the easy cost reductions.
The third point is that now is the time to be setting up for next season. In some cases that will mean selling cull cows early to ensure more feed available for wintering cows on the home farm. In many other cases it will mean wintering less cows and going into next season with lower numbers.
One of the fascinating outcomes from this current year is that despite cow numbers being down markedly, overall seasonal production is looking like being remarkably close to last season. This is despite the poor start to spring. There have to be some lessons in there.
I continue to hear poor advice in relation to supplementary feed. We all know that pasture is the lowest cost feed – as long as the fixed costs of land ownership are not included. But pasture does not always grow when we need it.
I know of one large farming group that works on the basis of feeding only half the calculated deficit. That can and does work in some circumstances and for short periods. But hungry cows always find a way to penalise their owners. In broad terms, for every 7kg of feed deficit, a cow either produces 1kg less milksolids, or loses 2kg of liveweight, or some combination thereof.
Every farmer needs to work out for his or her own situation what are the best methods of dealing with a feed deficit. The cheapest way to produce additional feed is often to apply nitrogen fertiliser, but of course there are limits. In other cases, there is definitely a place for the sometimes maligned PKE. Or it may be best to take another look at cow numbers.
The key point is that reducing feed in isolation from other system changes is a recipe for disaster.
Also, many farmers and rural professionals are prisoners to the notion that a low input system will be a low cost system. The evidence I have seen over the years shows very clearly that most of the differences in cost of production are due to factors other than system intensity.
My concluding message is to emphasise that right now is the time to get plans in place for next season. And it is much better to plan on the assumption that it is indeed going to be a very tough year, and then be proven wrong, than to assume the reverse and be proven wrong.
In particular, don’t be mislaid by early estimates of the payout for 2016/17. Quite simply, no one can predict prices for 2016/17 with any confidence. All we can say it that it is more than possible that the early season payments will be distressingly low, and that the view beyond there is totally foggy. That is the nature of commodity markets.
Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. His archived writings are available at http://keithwoodford.wordpress.com
Content supplied by Rabobank
New Zealand’s agricultural sector is looking at mixed prospects in 2016, with dairy facing another difficult year but most other sectors expected to perform well, according to a new industry report.
In its Agribusiness Outlook 2016, global agricultural specialist Rabobank says dairy prices continue to be weighed down by strong supply growth, particularly out of Europe after the recent removal of quotas.
Releasing the report, Rabobank general manager Country Banking New Zealand Hayley Moynihan said the recovery in dairy prices now risks arriving too late to enable a confident start to the 2016/17 season.
“Dairy prices are expected to begin to pick up in the latter half of 2016, but the timing of the recovery will be driven by how quickly the brakes can be applied to global milk production,” she said. “With cash flows in the dairy sector expected to remain tight throughout 2016, thankfully there is little change foreseen in operating costs such as fuel, fertiliser and interest rates, although supplementary feed costs will hinge on pasture growth."
“A weak and falling NZ currency will provide only partial compensation for low international dairy prices for local farmers, particularly given hedging already in place.”
While dairy faces another tough year, Rabobank foresees a generally strong year ahead for most other agricultural sectors.
Rabobank general manager of Food & Agribusiness Research Tim Hunt said solid demand in key offshore markets, recent progress in export development and generally tight global supply is likely to bring another good year for New Zealand producers of beef, wool and horticultural products.
“While beef prices have lost some ground in recent months, they remain well above multiyear average levels, and are expected to receive support from a generally tight global market,” he said “Wool producers will face headwinds from cheap synthetic fibres, but see support from declining production in New Zealand and Australia.”
Mr Hunt said the wine industry was looking set for a better year in 2016, with improved climatic conditions likely to underpin an increase in production, average prices holding up well and good momentum for New Zealand product sales in the US and Chinese market.
“The trend in consumer preferences is positive for New Zealand wine, as we see a shift towards higher-priced wine and lighter styles,” he said.
Lamb producers face a less buoyant 2016, Mr Hunt said.
“Challenging seasonal conditions have driven a surge in slaughter rates early in the season, with prices likely to remain under pressure given generally sluggish demand,” he said.
The Rabobank Agribusiness Outlook found currency, financial volatility, the Chinese economy, climate and oil prices were all swing factors which had the potential to impact the prospects for New Zealand agriculture in 2016.
A dry week nationally with some areas again beginning to frizzle up after the recent hot temperatures and NIWA reminding weather watchers they anticipate El Nino conditions will hang around for a month or two yet.
In Canterbury the Opuha dams irrigation restrictions have been lifted as the lake has filled enough to give hope the autumn watering period will be unbroken, and January rains have seen a spectacular turnaround for dryland feed conditions.
ECan has announced changes to the Hinds/Hekeao plains environment plan in Ashburton with restrictions on further land intensification to try and reduce the high levels of nitrates in the groundwater, but as there was plenty of farmer involvement in devising these changes good support is expected.
Spore counts have lifted in the upper North Island with all the moist weather and zinc supplementaion is being increased to prevent facial excema affecting livestock grazing at risk pastures.
The Oceania dairy prices were stable after the poor auction result that saw prices fall by 7.4%, lead by whole milk powders which dropped by over 10% and shattered any hopes of an early recovery this year.
Production figures in Europe continue to increase in a global market awash with milk, and reflects inefficencies of their subsidised systems, and now the French are asking the EU to pay them to reduce milk flows.
Unfortunately more falls are being seen on the futures platform for whole milk powder trades, and farmers will be hoping that results in next weeks auction may at least make a bottom to this unsustainable milk price market.
Once again farmers will have to try and trim their budgets even harder to survive, and the present problems are sure to affect all dairy graziers as well.
The recent reduction by both fertiliser Co-Ops on the price of Urea and DAP will be a welcome help in reducing costs, but talk of an uncompromising stance by one bank to Southern indebted dairy farmers, and an increasing number of recievership sales notices in real estate pages, makes all in the sector nervous.
The latest Federated Farmers survey revealed low levels of confidence driven mainly by poor commodity prices and difficult climatic conditions.
In Southland there has been an upsurge in feed pads and barns as managers look to overwinter at home, and keep animals off wet soils to ensure environmental standards are being met.
Schedules dropped sharply this week on a soft market, as processors report that frozen forequarters purchased mainly by customers from China and the Middle East, are now priced at 15 year lows and are heavily influential in the present low returns.
The local trade lamb schedule followed export prices down and prime lambs sold via the saleyards are now averaging in the late $80’s, back from the $90’s pre Christmas.
An autumn contract for prime ewes has been set at 280-290c/kg CWT for the north and 255-265c/kg CWT for the south, which is above the present market by $3-$7/ head for an average cutting ewe.
A small glimmer of hope that could increase future demand for lamb, with NZ lifting the trade sanctions for the Iranian market which in the 1970's was the countries largest destination country for that product.
Last months rain has reinvigorated the store ewe market with a strong sales seen in all saleyards from farmers keen to restock their depleted breeding flocks after selling early for the predicted dry El Nino.
With cashflow sure to be an issue with the weak lamb prices, many farmers will be in quite a dilemma with what to do with surplus feed, as returns from earlier sales do not cover present price levels for store stock.
Also, alternative grazing options appear thin, with dairy grazing opportunities shrinking, store beef cattle pricing looking more risky, and demand for selling surplus feed weakening with every rain, and the banks sure to be nervous about lending more at present.
Another double island wool sale saw prices ease on the back of a stronger exchange rate especially for the influential US dollar, as prices fell across the board and vendors expressed their displeasure by passing in 30% of the South Island offering.
Wool Services International is offering through its Purelana brand a second shear contract at $5.70 /kg clean, as they look to attract a firm supply for it’s existing customers.
With last months rain, good lambs wool prices, and poor meat values, more works lambs should be shorn this year as managers look to keep cash flow going and try to increase weights to compensate for poor present returns.
Stable beef schedules this week as processing numbers fall, and volumes are now behind last year after being well ahead a month ago.
South Island local trade schedules lifted again this week and gave a boost to prime steers at the saleyards and values returned over $3/kg lwt for quality animals.
Shortage of supply seems to be an issue in those areas that suffered from early feed deficits, and processors report some difficulty meeting demand for chilled beef orders.
The store cattle market followed upward in spectacular fashion with last weeks small yarding at the Canterbury saleyards attracting bids well in excess of that offered for prime animals, and suggests the beef weaner calf market should also be hot if feed conditions allow.
More stable venison prices this week that reflects a summer bottom, and successful negotiations for the frozen programmes.
With few options avaliable out of the unprofitable sheep and dairy sector, renewed interest appears to be starting at last for breeding hinds and strong demand continues for animals with velvet genetics no matter what sex.
The velvet harvest season comes to a close with growers very happy with prices and will now be preparing for the mating and the roaring period, where good management practices are needed to minimize environmental damage and weight loss to stags.
ANZ's economists have lowered their Fonterra milk price forecasts to $3.95/kg of milk solids (MS) for the current 2015/16 season, and $5.00/kg MS for 2016/17.
This a substantial revision down from the bank's previous forecasts of $4.25 and $5.50-$5.75/kg MS, respectively.
Fonterra itself has a forecast of $4.15 for the current season, although the latest GlobalDairyTrade auction suggests this will come under pressure.
ANZ's forecast for 2015/16 is lower than Westpac's and ASB's, which sit at $4.20/kg MS and $4.10/kg MS, respectively.
It notes its estimates suggest a cumulative loss of around $1.50/kg MS over the two seasons if its forecasts become reality, or if more cost efficiencies can’t be found over coming months.
ANZ is the country's biggest rural lender, disclosing dairy exposure of $11.3 billion as of last June. It says:
Price action is poor and European supply dynamics are very bearish at present. There simply appears too much supply for the market to handle despite some encouraging demand signals and the likes of China’s import requirements having improved.
Two important structural shifts in the form of increased European supply and a lower cost of production are dominating. Both these factors are expected to continue to suppress prices and delay expectations for a rebound.
USD dairy prices are weaker and the NZD is more elevated than what we had previously assumed. As such, it’s difficult to maintain a mid-$5/kg MS forecast for 2016/17.
We are encouraged by the steps being taken to drive cost efficiencies and improve productivity amidst a challenging payout backdrop. More of the same will be required over the years ahead. A return to positive cash-flow will now not likely be seen until 2017/18.
The economic knock-on to the dairy sector and broader economy will be substantial. Lower dairy prices are at the forefront of a near 20% fall in New Zealand’s goods terms of trade over 2016; that’s a huge hit to the economy’s purchasing power and enough to knock up to 3 percentage points off GDP growth over two years. 2016/17 will represent the second successive year of a sub-breakeven payout (in terms of pure cash-flow as opposed to the payout). The sector is just under 5% of GDP directly and with the indirect channel close to 10% of GDP. A further step lower in dairy prices is also coming at a time funding costs are on the rise; that’s a nasty mix.
With low international prices, a lower dairy payout and likely pressure on cash-flow until 2017/18 ups the ante on the OCR needing to move lower (the December MPS included a low export price scenario that required 50bps of easing), we are not yet at that juncture. The rest of the economy is generally vibrant / performing well and until we see material signs of a turn we’ll remain in the no change camp.
The New Zealand economy is more than dairy alone, but challenges in the sector need to be respected and closely monitored in terms of the economic flow-on impacts.
By Allan Barber*
The release of the 2016 quota allocation which Alan Williams analysed in detail (Farmers Weekly 11th January) show some considerable shifts in tonnage entitlements between the major meat exporters.
The quota is allocated as a percentage of the total allowable quota for shipment to the EU for sheepmeat and USA for beef during a calendar year; in the last two years New Zealand has only filled around 75% of the EU quota and 90% and 98% of the USA beef quota.
This shortfall, especially for sheepmeat, has been a result of the lower lamb kill, economic conditions in Europe and the availability of China as an alternative market eager for product at a competitive price. In 2014 China also took large quantities of beef.
The figures are particularly significant when the three year moving average nature of the allocation system is taken into account. This means the annual quota breakdown is based on one third of the change in each company’s tonnage production for each of the previous three years. As a result of the volume changes for the last two years the big mover in sheepmeat and to a lesser extent beef has been AFFCO which gained 4,400 tonnes and nearly 2,800 tonnes respectively year on year.
These increases suggest an annual production gain between 2014 and 2015 of 13,200 tonnes of sheepmeat on a reduced national kill and 8,400 tonnes of beef. Some of the sheepmeat increase can be attributed to the impact of new processing facilities in Southland and Canterbury with beef also benefiting from the Malvern plant. These gains appear to have come directly from the two South Island cooperatives and against an industry backdrop of large dairy conversions at the expense of sheep and beef.
Although it is impossible to calculate exact annual revenues for AFFCO which doesn’t publicly disclose its figures, an assessment of its overall volume and value gains suggest it has overtaken ANZCO which has experienced a relatively small gain in sheepmeat offset by a small loss of beef share. In fact AFFCO has probably assumed the mantle of the second largest meat company from Alliance because of its much more equal balance between sheep and beef. Profit from beef has been far more reliable than from sheepmeat over the last two years.
However I can’t imagine Alliance will be particularly upset by this change in pecking order because its main preoccupation is with making a success of its position in the far south as New Zealand’s only remaining cooperative. Its main objectives are to continue to meet the needs of its member suppliers and to revamp its business by cutting $85 million of excess cost out of its overheads. This will be achieved by efficiencies which ought to have been implemented already, not by sucking it out of farmers’ pockets as one disaffected supplier suggested recently.
Silver Fern Farms has seen its sheepmeat tonnage fall by 8,000 tonnes or 14% since 2010; however this loss of share has been offset by a considerable gain in beef which has actually increased by a similar amount in both tonnage and percentage terms.
While this analysis may appear to be of no great significance to anybody except the boards and senior management of the companies, it is important from a couple of perspectives.
The improvement in the relative strength of privately owned companies at the expense of farmer owned cooperatives has several causes, but it suggests a growing number of farmers are voting with their livestock. There are other reasons such as dairy conversions and lower sheep numbers, offset by larger quantities of dairy origin cattle whose farmers may belong to a dairy cooperative, but feel no need to belong to another for their meat processing.
It is also possible single focus beef or sheepmeat companies like Greenlea, Ovation and Universal may be more successful and therefore more attractive to a farmer looking to maximise the value of his or her output. Processing efficiency is another factor to affect relative strength, as demonstrated by AFFCO’s recovery since Talley’s acquired the whole company.
Talley’s key focus has been on ensuring all the plants are maintained right up to the highest standard and at the same time demanding best practice industrial contracts. This hasn’t won too many friends, especially among the union and the media, but the livestock market share gains, illustrated graphically in the latest year’s quota allocation, suggest farmers actually like dealing with a highly efficient processor. This certainly wasn’t the case 20 years ago when AFFCO was hanging on by its finger nails, trying to modernise its plants while rescuing its balance sheet.
It is well known SFF, with the exception of its Te Aroha plant, has a significant amount of upgrading and rationalisation to do, while Alliance’s admission it must spend $85 million on cost reduction indicates a similar problem.
The conclusion from this analysis of the quota allocation results appears to be very logical. Farmers prefer to deal with winners who may not necessarily always be the highest payer, but are seen as efficient and successful, as well as providing security of payment for livestock. 2016 will be interesting, first to see when the OIO will announce its decision about Shanghai Maling’s bid for 50% of SFF and secondly when SFF and Alliance will begin to address their cost structures.
We may see some evidence of this when next year’s quotas are allocated.
*Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at firstname.lastname@example.org or read his blog here ». This article first appeared in Farmers Weekly and is here with permission.
By David Hargreaves
Fonterra's under yet more pressure with its milk price forecast for the current season after global dairy prices fell again - and by more than expected - overnight.
Futures trading had suggested another fall was likely in the latest GlobalDairyTrade auction. But in the event the 7.4% drop in the GDT Index was more sharp than had been indicated, with weakness across the range of products.
The key Wholemilk Powder (WMP) price retreated a further 10.4% to an average US$1942 per metric tonne. WMP prices have dropped by 15% since the start of the year - at a time when Fonterra had been hoping for them to pick up.
Of great concern would be the fact that longer-dated WMP contracts were particularly weak, with both the June and July delivery contracts shedding 13% in the latest auction. The longer dated contracts tend to be a good pointer toward future direction of prices.
The latest auction outcome must now start to raise the spectre of a third consecutive poor season (IE next season) for farmers.
The WMP price is now some 30.9% below where it was in October 2015 after there had been a sharp rally following an early August trough in the WMP price of just US$1590/MT. The current price is still some 22.8% higher in American dollars than that lowpoint, while for comparative purposes, it is worth throwing in that in August the NZ dollar was worth about US65.5c versus around US64.8c today.
The dairy giant last week pared back its forecast milk price for farmers this season to $4.15 per kilogram of milk solids from the previous estimate of $4.60. But even this lower forecast now starts to come under threat from the continued slide on the global markets. See here for the full dairy payout history.
AgriHQ dairy analyst Susan Kilsby conceded that the GDT prices had been "even weaker than the market expected".
"Dairy commodity markets remain very bearish as the global milk supply exceeds demand for dairy products. European milk production continues to expand, particularly in Ireland, the Netherlands and Germany.
"It is unlikely we will see a recovery in the markets until late 2016,” she said.
ANZ senior economist Mark Smith said the price action at the auction was weak, with the upward sloping curve for WMP "now no longer evident".
"At this stage it is difficult to see an imminent turnaround in prices and it places pressure on Fonterra’s (already downwardly revised) milk price for 2015/16 and will weigh heavily on the opening milk price forecast for 2016/17," he said.
ASB rural economist Nathan Penny said ASB economists had now lifted their milk production forecast for this season to 3% below last season from their previous view of 6% below.
"Earlier fears of a summer drought, owing to the strong El Niño weather pattern, have largely receded. With shock-effect of an El Niño drought largely removed, the risk is that global production may hold higher for longer than previously thought," he said.
"As a result, we place this season’s and next season’s milk price forecasts under review."
Penny said ASB was sticking with its 2015/16 milk price forecast of $4.10/kg "for now".
"However, the ongoing price weakness increases the downside risks to this forecast and next season’s as well.
"...Meanwhile, this result reinforces our [Official Cash Rate] view; we expect two further cuts in June and August this year, taking the OCR down to 2% from 2.5% currently."
Westpac senior economist Anne Boniface said the latest GDT auction had introduced some downside risk to Westpac's "freshly minted" $4.20 farm gate milk price forecast for this year.
"But perhaps even more importantly, it also throws our $5.20 milk price forecast for 2016/17 season firmly into the spotlight. While there is plenty of water to go under the bridge between now and the end of next season, our 2016/17 farm gate milk price forecast assumes WMP prices average around $2400/tonne. But with WMP prices just $1952/tonne after last night’s auction, these levels currently look some way off."
Content supplied by Synlait Milk
Synlait Milk has revised its forecast milk price for the 2015 / 2016 season from $5.00 per kgMS1 to $4.20 per kgMS.
Chairman Graeme Milne said the revision is driven by the sustained low global commodity prices since September 2015, and a view that the recovery will be slower than anticipated.
“Our previous forecast of $5.00 kgMS expected prices to recover somewhat by this stage in the season, however this hasn’t happened and our revised forecast reflects this,” said Mr Milne. “Similar to this time last year, there is still a lot of uncertainty. While our business is focused on value added products, global commodity pricing is the main driver behind the milk price that our suppliers receive.”
“European milk production is high following the removal of quotas last year. Low oil prices mean cheap feed for farmers in Europe, USA and China while demand for imported dairy commodities by China, the world’s largest importer, has declined as their local milk production has increased.” Mr Milne said.
Synlait will continue to monitor the situation and expects to revise the forecast milk price again in May 2016.
Managing Director and CEO John Penno said there is no doubt this year will be very tough for dairy farmers, with two straight years of unsustainably low milk prices. “It’s important that we continue to give our suppliers a clear and realistic idea of where the milk price is likely to end up. As always things may change, and we hope they do because it’s hard to run a dairy farm business in this environment,” said Mr Penno.
“More than half of our suppliers are now involved in our Lead With Pride™ and Special Milk programs. Each program offers a premium payment over and above the Synlait base milk price for differentiating milk on farm.”
“But it’s still very tough out there. We’re meeting with our suppliers in a few weeks to create a forum where their ideas and options around managing through this period can be shared. They’re not alone and we’re committed to supporting them where we can,” said Mr Penno.
The history and level of payout levels for all dairy companies are here.
A 1235 hectare dairy farm south east of Taupo has been put on the market by its receivers.
Taharua Farm on Taharua Rd, at Rangitaiki about 38 kilometres south east of Taupo has been advertised for sale by international tender by Bayleys Real Estate.
The farm neighbours Lochinver Station which was to have been purchased by Chinese company Shanghai Pengxin until the sale was blocked by the government last year.
Had the sale of Lochinver proceeded, Shanghai Pengxin would also have purchased Taharua Farm.
The farm is owned by Fleming & Co (as trustee of the Country Spirit Trust) which was placed in receivership in October last year.
The first report by receivers BDO listed its main creditor as ASB Bank which was owed $17.84 million.
According to QV.co.nz the farm had been purchased for $15.55 million in 2006.
Fleming & Co is believed to have sold the farm's livestock to Shanghai Pengxin's Dakang NZ Farm Group for around $7.34 million, which also took a lease over the property ahead of its planned purchase.
However the lease is understood to expire in the middle of this year.
Dakang is believed to have agreed to pay $14.25 million for the land and remaining assets had the sale gone ahead.
Bayleys said the farm was milking about 2500 cows and in the 2014/15 season produced 519,477 kg of milk solids and was aiming to produce 700,000 kg in the 2015/16 season.
However the livestock grazing the property are not included in the sale.
The farm has four modern, 3-4 bedroom homes on it, two 80 bail rotary cowsheds, two calf sheds, a 100 tonne fertiliser bin, three bay barn and a range of machinery and storage sheds.
Water for irrigation and stock is drawn from the Taharua River and the farm has an effluent disposal system.
Tenders for the property close with Bayleys on March 10.
Fonterra has cut its forecast Farmgate Milk Price for the 2015/16 season to just $4.15 per kilogram of milk solids from the previous forecast of $4.60 and concedes that this will be "very tough" for its farmers.
With a dividend of perhaps 35c to 40c on top, this means a potential total payout to farmers of only $4.50-$4.55per kgMS.
Labour's finance spokesperson Grant Robertson said the move would cost farmers "tens of thousands of dollars" and said many "will be under more and more pressure".
While Fonterra had been widely expected to trim its forecast in the wake of recent GlobalDairyTrade auction results, the new price pick is still very much at the low end of market expectations (although ASB economists were picking an even slightly lower price of $4.10). See here for the full dairy payout history.
The dairy giant's earlier price pick of $4.60 had been dependent on a recovery in global dairy prices early this year. But while it is generally expected still that prices will recover as the year goes on, such a recovery is now simply going to come too late to salvage this season.
The co-operative's chairman John Wilson said global economic conditions continue to be challenging and are impacting demand for a range of commodities, including dairy.
“Key factors driving dairy demand are declining international oil prices which have weakened the spending power of countries reliant on oil revenues, economic uncertainty in developing economies and a slow recovery of dairy imports into China. In addition, the Russian ban on European Union dairy imports continues to push more product on to the world market.
“There is still an imbalance between supply and demand which continues to put pressure on global milk prices. Since last September, prices on GlobalDairyTrade for Whole Milk Powder (WMP) have fallen 12% and Skim Milk Powder (SMP) prices are down 8%.
“Although New Zealand farmers have responded to lower global prices by reducing supply, that has yet to happen in other regions, including Europe, where milk volumes have continued to increase.
Fonterra chief executive Theo Spierings said while global demand remained sluggish, Fonterra supported the general view that dairy prices will improve later this calendar year.
“However the time frame for supply and demand rebalancing has moved further out and largely depends on a downward correction in EU supply in response to the lower global prices. These prices are clearly unsustainably low for farmers globally and cannot continue in the longer term.
“It is important to state that despite the current challenges, we have confidence long-term international dairy demand will continue its expansion due to a growing world population, increasing middle classes in Asia, urbanisation and favourable demographics.
“While a unique series of global issues are impacting the forecast Milk Price, the business is performing well, as outlined in our business update in November, and is on track to generate improved dividend returns. Fonterra has remained focused on reducing costs, increasing efficiencies and shifting more milk into higher value products,” Spierings said.
Wilson said: “The reduction in the forecast Farmgate Milk Price will be very tough on our farmers. As we confirm the Co-op’s performance for the first half of the financial year, we will look at the best way to help our farmers’ cash flows, underpinned by the expected improvement in dividend returns and the financial strength of the Co-operative.
“We will continue to keep our farmers updated as the season progresses.”
This is the full statement from Labour's finance spokesperson Grant Robertson on the Fonterra announcement:
Milk payout drop: Govt must take action on economy
National must take urgent action to diversify the economy after Fonterra slashed its forecast milk solids payout in a move that will cost farmers tens of thousands of dollars this year, says Labour’s Finance spokesperson Grant Robertson.
“The sudden drop in forecast milk solids payout from $4.60 to $4.15 is terrible news for farmers and the regions they support.
“Federated Farmers Dairy Chair Andrew Hoggard said the fall could cost farmers over $50,000 on average and that ‘we could be looking at a third season of low prices’.
“With receiverships already happening, many farmers will be under more and more pressure.
“The drop comes a day after Fitch ratings agency revised our near term growth prospects downward because of declining prices for dairy exports and on the same day the Reserve Bank said dairy prices remain a risk.
“The Reserve Bank Governor can’t fix the economy on his own. He’s stuck between the rock of low inflation and falling growth and the hard place of the Auckland housing market.
“Yesterday’s Auckland-focussed announcements on infrastructure spending won’t be well received in regions that are mostly reliant on dairy farmers succeeding.
“New Zealand needs a more diversified economy to help insulate us from major commodity shocks. We need to invest in job-rich industries and support companies to move up the value chain. We can also bring forward projects to stimulate the economy. Despite more than a year of warnings as dairy prices have plummeted there has been no real effort from the Government to do this.
“This year looks like one of the most volatile since 2008. National can’t sit on its hands and do nothing,” says Grant Robertson.