sign up log in
Want to go ad-free? Find out how, here.

Fonterra reduces milk price forecast for this year; opening forecast for next year of $7

Rural News
Fonterra reduces milk price forecast for this year; opening forecast for next year of $7
<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

Fonterra has cut its forecast milk price for this year to $8.40 per kilogramme of milk solids from the previous pick of $8.65.

And the co-operative has come in with an opening forecast for the 2014/15 season of $7 - which is higher than some economists were picking.

The New Zealand dollar rose to US85.6c from US85.4c prior to the announcement, suggesting that the marketplace was pleasantly surprised by the size of next year's forecast price.

It's worth remembering that a year ago Fonterra's first pick for this year's milk price was just $7, with the forecast price subsequently rising and rising as global dairy prices surged. See here for milk price forecast articles over the past year and see here for historic milk price information.

For the current season, Fonterra's maintained its dividend forecast of 10c, which means the total forecast payout will now be $8.50, down from the last forecast of $8.75.

Westpac senior economist Anne Boniface said that the opening $7 price for next year was "probably a touch stronger" than the market had been expecting, though "very consistent with our own milk price forecast which sits at $7.10". 

"Also as expected, Fonterra downgraded its current season milk price forecast to $8.40/Kg Ms (down from $8.65). This season there has been a gap between the theoretical milk price implied by the milk price manual and Fonterra's forecast.

"This was driven by  Fonterra's ability to maximise its revenue given the gap between milk powders and other product streams. Fonterra noted that while the theoretical calculation from the milk price manual is now 40c lower (falling from $9.35 to $8.95) the board had decided to reduce the gap between the theoretical price and the forecast milk price to 55 cents (previously 70c)," Boniface said.

"...Despite the more positive tone to today's release than many had been braced for, there's no denying that dairy farmer's cash flows in the 2014/15 season will be well down on the current season. However, this is unlikely to come as a surprise to many farmers, who by and large seem to have been taking a relatively cautious approach to the very strong revenue growth this season. Many have opted to use additional cash flow to reduce debt."  

ANZ chief economist Cameron Bagrie and rural economist Con Williams said in a research note that while the forecast $7 milk price for next year represents a substantial fall in percentage terms from the 2013/14 season, it is still the 4th highest on record and is above the seven year average of $6.63/kg ms.

"Unlike in prior bumper payout years, the cost line hasn’t exploded upwards; that’s an encouraging dynamic and means the rural sector is very well placed to absorb the payout falling (from extremely high levels), leaving profitability strong," they said (see chart just below). 

"The dividend also needs to be added, and we expect that will be better than the current season’s 10c per share. This is due to the realignment in reference and non-reference product prices that has recently taken place, an assumption there will be no more quality/product recall issues, and improving prospects for the Australian business." 

Earlier today Fonterra announced a restructuring of its decade-long Latin American partnership with food giant Nestle. 

Fonterra's selling its share of the joint venture's milk powder business to Nestle, along with its share of the business in Ecuador. Fonterra will take a 51% controlling stake in the Brazil part of the venture and will buy Nestle completely out of the business in Venezuela.

Fonterra says the net impact of the deal is that it will receive $96 million in the next financial year.

The cut to the current season's milk price forecast was largely in line with recent market expectations, following some sharp fall in global dairy prices from the extremely high levels seen earlier.

However, the opening forecast for next season, is better than some economists were expecting.

The forecast cash payout for the 2014/15 season - which comprises the Forecast Farmgate Milk Price and dividend for the 2014/15 season - will be announced in July when Fonterra’s budget is completed and approved.

Fonterra chief executive Theo Spierings said the shift in supply and demand in global markets over the past few months showed that volatility continued to exert a strong influence over the global outlook for dairy.

"Dairy commodity prices have come off the peak reached in early February this year, as global supply and demand have rebalanced.

"There is currently more milk available for the international market to absorb. We expect demand from China to remain strong. In Russia, there will be pressure on the balance between imports and local production. These factors are expected to continue influencing the supply-demand balance," he said.

Here is the full statement from Fonterra:

2014/15 season opening forecast Farmgate Milk Price

Fonterra Co-operative Group Limited today announced an opening forecast Farmgate Milk Price of $7.00 per kgMS for the 2014/15 season - matching the opening forecast provided 12 months ago at the start of the 2013/14 season.

The forecast Cash Payout - which comprises the Forecast Farmgate Milk Price and dividend for the 2014/15 season - will be announced in July when Fonterra’s budget is completed and approved.

The Co-operative is forecasting milk supply for the new season of 1,616 million kgMS – up 2 per cent on the current season forecast of 1,584 million kgMS.

Chairman John Wilson said the new season Farmgate Milk Price forecast remained historically high, matching the Co-operative’s opening price of the previous season, but also reflecting current market conditions.

“Our farmers understand the realities of dairy commodity price cycles, and will exercise caution at this early stage in the season,” he said.

Chief Executive Theo Spierings said the shift in supply and demand over the past few months showed that volatility continued to exert a strong influence over the global outlook for dairy.

“Dairy commodity prices have come off the peak reached in early February this year, as global supply and demand have rebalanced.

“There is currently more milk available for the international market to absorb. We expect demand from China to remain strong. In Russia, there will be pressure on the balance between imports and local production. These factors are expected to continue influencing the supply-demand balance,” said Mr Spierings.

The Co-operative also confirmed today that it is reducing its current forecast Farmgate Milk Price for the 2013/14 season to $8.40 per kgMS. Along with a reconfirmed forecast dividend of 10 cents per share, the change amounts to a forecast Cash Payout of $8.50 for a fully shared-up farmer.

Chairman John Wilson said that when the last forecast was made in late February, the forecast Farmgate Milk Price derived under the Milk Price Manual was $9.35. The Milk Price Manual calculation is now 40 cents lower at $8.95.

“When we announced the last forecast Farmgate Milk Price, it was 70 cents per kgMS below the then Milk Price Manual calculation. We made that decision to protect the Co-operative.

“After seeing recent improved stream returns on powders and other products, and considering the level of risk likely in the remaining three months of the financial year, the Board has decided to reduce that 70 cent gap by 15 cents, to 55 cents.

“That is why today’s forecast Farmgate Milk Price amounts to a 25 cent net reduction from $8.65 to $8.40,” he said.

Chief Executive Theo Spierings said volatility remained an issue. The revised forecast reflects the recent fall in global dairy commodity prices, as well as the impact of currency movements.

“Our previous guidance on the earnings range remains unchanged.

“GlobalDairyTrade (GDT) prices have tracked down in recent events, with the GDT price index down more than 22 per cent since a peak on February 4, 2014. Since that date, prices for whole milk powder on GDT have decreased by 22 per cent, while skim milk powder prices are down 23 per cent.

“Despite the weaker auction results, the New Zealand dollar has remained firm. The exchange rate has moved from NZD/USD 0.835 to sit above NZD/USD 0.855 for the majority of the last two months,” said Mr Spierings.

The forecast Farmgate Milk Price change for the current season will not mean any revision to the June payment of the Advance Rate Schedule. The 25 cent net reduction will be spread over the July to October payments.

Note: currency is New Zealand dollars unless otherwise stated.

Fonterra share price

Select chart tabs

FCG Daily
Source: NZX
FSF Daily
Source: NZX

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

7 Comments

Well, the electrons in banks' networks will being humming over the next while, to answer such pressing questions as:

 

  • What is the projected state of our rural loan book in 12, 18, 20, 24 months' time?
  • What is the projected effect on bank revenue streams and cash flows?
  • What is the projected effect on rural loan account manager commissions, bonuses and other priovileges?
  • What is our exit strategy from the more exposed edges of these portfolios?

T-would be Interesting indeed to be a Fly on the Wall at some of the forthcoming come-to-Jesus meetings that will be called...

Up
0

Why? I thought that was pretty good, better than I thought, particularly the opening. Likes of Synlait Milk will be pleased, good profit there with the current season drop.

Up
0

The $5 advance will make bankers and farmers happy.  Strong cashflows from the beginning of the season - but will there be a sting in the tail at the end of next season?

Up
0

I actually thought they would be more worried about dropping this seasons price and so would drag a bit back from next seasons cashflow to cover it.

Up
0

Yes I was a bit surprised too. But note how they describe the new advance price - Base payment $4.48 and capacity adjustment of $0.52.  I hope all owners with sharemilkers/contract milkers have already had the discussion around the capacity adjustment payment.  That often isn't shared with those on a contract so we don't want anyone getting in to strife over not having sorted this prior to the commencement of the new season.

Up
0

Bit of burr under the saddle there. For us we had zero  exposure to the adjustment, as it should be (sharemilkers) now we are forced to. But the kicker is that in a ordinary year we will be well and truly better of. But in the last 2 drought years we would get crucified. So what's it gonna be this year?

Up
0

No surprises about the drop, won't be surprised if they trim another 15-30 c.  It was always said "don't count it until you get it".

The $7 is interesting and should be a good target, but with a $5 start it's going to be important to manage cashflows carefully, as no "catch up" payments.

Up
0