Dairy giant Fonterra has cut its milk price forecast for the second time in little more than a month and is now forecasting a price for its farmer suppliers that's some $1.20 lower than forecasts made earlier in the current season.
A series of downgrades have been made by the Fonterra co-operative since the latter part of 2022 in response to sagging global dairy prices. Although prices have been in US dollar terms fairly flat since the start of this year, prices in the GlobalDairyTrade auctions are overall about a third lower now than they were 12 months ago.
Having started the current season with an implied pick for the milk price of $9 per kilogram of milk solids, then actually increasing it to $9.50, Fonterra's subsequently reduced it four times, the latest forecast by 20c, which follows a 50c reduction in late February.
The term 'implied' is used here because Fonterra's policy is to announce the milk price forecast in a price 'range', and the implied price is the 'mid-point' of the range.
On Monday Fonterra said it had trimmed the range from $8.20 - $8.80 per kgMS (as of the late February forecast) to $8.00 - $8.60 per kgMS.
This reduces the midpoint of the range by 20 cents from $8.50 to $8.30 per kgMS.
Last season Fonterra's actual milk price payout was a record $9.30 per kgMS.
Fonterra's chief executive Miles Hurrell said the latest reduction was due to short-term demand for products "that inform the co-op’s farmgate milk price" being "softer than expected".
"Since our last update in February, prices for our products on Global Dairy Trade have either declined or remained flat.
"Skim milk powder prices have fallen 7% since February, and whole milk powder prices have not lifted to the levels assumed in the previous forecast."
Hurrell said there were "two main drivers" behind this trend. The first was that demand from China for whole milk powder has not yet returned to expected levels. The second is Northern Hemisphere milk production, and therefore skim milk powder stocks, are increasing "as they head into their Spring flush".
"With these factors weighing on demand, prices have not increased to the levels required to sustain a higher forecast Farmgate Milk Price for this season," Hurrell said.
"We recognise this change has an impact on our farmers’ businesses, at a time when many are facing increasing costs."
Hurrell said to assist on-farm cash flow, Fonterra was adjusting the Advance Rate schedule, which is the proportion of the season’s farmgate milk price paid to farmers each month, to get cash to its farmers earlier.
"We have increased the March paid April payment and plan to hold payments at that level until June.
"We are able to do this because of the strength of the co-op’s balance sheet, which is further supported by our strong full year earnings forecast."
Hurrell said Fonterra's full year forecast normalised earnings of 55-75 cents per share remains unchanged.
"We remain positive about the outlook for next season and will share our opening 2023/24 farmgate milk price forecast in May."
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