Fonterra slashes Farmgate Milk Price forecast for 2014-15 to $6 per kgMS from $7, with dividend full forecast cash payout range is $6.20-$6.25

Fonterra slashes Farmgate Milk Price forecast for 2014-15 to $6 per kgMS from $7, with dividend full forecast cash payout range is $6.20-$6.25

Fonterra has reduced  its 2014-15 forecast Farmgate Milk Price by $1 to $6 per kilogramme of milk solids, and announced an estimated dividend range of 20 cents to 25 cents per share.

The dairy co-operative says that amounts to a forecast cash payout of $6.20 to $6.25 for the current season. The announcement initially sent the NZ dollar down to 85.15 US cents from 85.40 USc.

Fonterra chairman John Wilson said the lower forecast Farmgate Milk Price reflects continuing volatility, with the GlobalDairyTrade price index down 16% since the start of the season on June 1.

“We have seen strong production globally, a build-up of inventory in China, and falling demand in some emerging markets in response to high dairy commodity prices. In addition, the New Zealand dollar has remained strong. Our milk collection across New Zealand last season ending 31 May 2014 reached 1,584 million kgMs, 8.3% higher than the previous season," said Wilson.

“This drop in the forecast Farmgate Milk Price will have an impact on our farmers’ cash flows. We continue to urge caution with on-farm budgets in light of the continuing volatility in international dairy markets,” Wilson said.

Fonterra's forecast milk price for the 2013-14 year is $8.40 per kgMS, with a dividend forecast of 10c, meaning the total forecast payout is $8.50.

Big income drop for dairy farmers; Downward pressure on NZ$

Westpac chief economist Dominick Stephens suggested a fall in the milk price to $6 from $8.40 will amount to a reduction in the collective income of New Zealand dairy farmers of about $4.3 billion, or 1.9% of Gross Domestic Product.

"At this stage of the season, the final payout remains very uncertain. Much will hinge on how GlobalDairyTrade auctions evolve over the few months ahead. Westpac is assuming a small further reduction in auction prices over the next month or two. We do expect a very substantial recovery in auction prices, but not until the last quarter of this year. Presumably, Fonterra's assumptions are similar.

"This forecast is one more reason to expect further downward pressure on the New Zealand dollar. We expect the NZ dollar to drop to US84 cents in the weeks ahead, and we are forecasting an average exchange rate of US83 cents over the remainder of 2014," said Stephens.

Fonterra CEO Theo Spierings said the dividend increase reflects Fonterra's expectations for improved returns from value-add and branded products, due to volume increases and lower input costs.

“As we continue to drive for growth in our consumer and food service businesses, during the first half of the current financial year we expect reduced cost of goods arising from lower dairy commodity prices to have a positive impact on returns," Spierings said.

“It is important to note that in light of the significant volatility, our dividend estimate is based on zero ingredients stream returns at this early stage in the season. We continued driving our V3 strategy throughout the previous season and that is why we can support an increased estimated dividend range for the 2014/15 financial year," said Spierings.

“Our forecasting anticipates some recovery in global dairy prices but it is too early to predict how strong this recovery will be or when it will kick in. We will provide an update on business performance when we announce our Annual Result on September 24,” Spierings added.

Increasing financial stress

Meanwhile, ANZ economists have tackled the question of at what milk price financial stress in the dairy sector starts to increase.

"There is no simple answer to this with a wide range of businesses and leverage within the sector. But with rising interest rates (a large proportion still on short-terms), we reckon a material increase in financial stress would be triggered by a milk price around the mid-$5/kg MS mark. That said, this would only start to show up in the 2015/16 season if there were another low milk price and opening advance," ANZ said.

"The offset this season is that a lower milk price is being signalled early enough in the season for some belt tightening to occur. High deferred payments from 2013/14 will also ensure there is plenty of cash in bank balances heading into a leaner year. Many believe the breakeven is higher than this, but this seems to ignore the fact that the 2012/13 milk price was just $5.84/kg MS and we had one of the worst droughts in some time."

In May the Reserve Bank said nearly 70% of the $32 billion worth of dairy farm debt was on floating mortgage rates,  meaning rising interest rates are likely to increase financial stress if incomes fall, which will happen if the payout drops.

The ANZ economists estimate a $6/kg MS price represents about a $3.3 billion fall in farm-gate revenue versus the record setting 2013/14 year.

"This fall is equivalent to around 1.5% of annual GDP and 3% of national labour income. Considering labour income growth is running at a circa 6% annual rate, the fall in dairy incomes would not be sufficient to see overall household income fall, but it is a significant headwind nonetheless. There is also likely to be an impact on the 2013/14 milk price and the amount farmers receive in October (although) this probably won’t be flagged until the final wash-up in September though. We expect this could be $0.10-0.15/kg MS at this stage," ANZ said.

No change to ASB's OCR outlook

ASB chief economist Nick Tuffley noted the fall in dairy prices has been well anticipated by the Reserve Bank and is one reason it has paused its cycle of Official Cash Rate increases.

"We aren’t changing our OCR outlook and don’t expect another OCR increase until December," said Tuffley.

 "For now we are maintaining our view of a $6.20/kg milk price, though Fonterra’s new forecast signals where the risk lies. We expect a degree of recovery in global dairy price to start before too much longer," added Tuffley.

He estimates the lower milk price means farm-gate revenue for Fonterra’s farmers will be down $3.8 billion year-on-year, with ASB's calculations assuming a 3% production lift over the season.

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Some positive spin now we are in the process of an election. I am not sure that is helpful to dairy farmers. I expect a $6.00 farm gate milk solids payout to require commodity prices higher than current or a NZD significantly below 0.80 USD.
 
The 2013/2014 final payout and the next update on forecast 2014/2015 will not be announced till the week after the election.

And the conversions keep going. Volume increases are not what you need when you have oversupplied a commodity.
 The neighbouring farm from me is in the process of being converted into a 1000 cow dairy, ready for next year. Makes one wonder how long we can go on shifting from sheep and beef to dairy. 

well not everything is getting through as this page turner for 21k hd shows.

We are therefore not able to grant consent to the preferred highly developed NTFE dairying proposal as promoted to us. However, we consider that the purpose of the RMA would stillbe met by granting consent to a reduced development involving dryland farming and/or a limited dairying operation with a reduced or scaled back water take and limited irrigation area on Balmoral.

http://ecan.govt.nz/news-and-notices/notices/pages/hearing-decisions.aspx

 

Converting more farms to dairy will only lock dairy farmers into long term lower returns. If I was a dairy farmer i wouldn't be happy about it.

A lot aren't tim12.  But thanks to DIRA we don't have a say.

“We have seen strong production globally, a build-up of inventory in China, and falling demand in some emerging markets in response to high dairy commodity prices."
So the Chinese have stocked up on milk powder and the like and now we await their appetite for more.
What I'm interested in; how many of those dairy heifers have we sent to China to start up their own dairy factories? I'm reluctant to use the word 'farm' in this context.
I thought i'd throw in some figures to show what the average dairy farmer will be losing in income.
Assume 500 cows producing 350kgms @ $8.40 = Income $1,470,000
                                                                        @ $6.00 = Income $1,050,000
I make that a 28.5% drop in income but still not a bad return assuming no drought or flood affecting production.
 
 
 

A $6 payout will certainly make things tight financially for many farmers. Most farms operate with Farm Working Expenses between $4 and $5 now days. Then, $1 to $2/MS in interest and principle repayments (if any).
That doesnt leave much room if we end up at $6.
'Dobrydan" are you saying that a 500 cow farm has an income of $1,000,000 + or a profit of $1,000,000 +??
Based on a $6 payout, a 500 cow farm with $4.50 FW expenses, and $1.50 interest payments does not leave anything for any personal drawings, capital expenses, unforseen costs etc etc.
While there is a long way to go with the current season, Colin is right that the GDT and USD have long way to go before Fonterra can even afford to pay $6!!!!
The big crunch will come if the current season stays at $6, and next seasons opening price is also low. Currently we are living off the FAT of last season.
Fingers Crossed
 
 

DJ Dave, I was referring simply to Income.
I was weighing up whether to assume FWE and interest costs and don't forget farmers have to live by taking out drawings but that would be too difficult to predict.
Interestingly, Fed Farmers made the comment today that 20% of dairy farmers will be running it very tight if the payout were to remain at $6.
Then again, most farmers are sharp enough to manage their finances and probably base their income on $6 anyhow. Last year was like one enormous Christmas bonus.
if push came to shove, some could also part with their shares to free up more capital. It will be interesting to see what Open Country comes up with for a payout this season.

re selling Fonterra shares - wrong dobrydan.  Fonterra tightly controls when 'wet' (production based) shares can be sold and how many a farmer can sell.  They control the total amount of shares that can be sold so if more farmers want to sell shares than the total share sell down Fonterra has set, then they are scaled back.  So far since TAF was introduced FOnterra has only allowed two such opportunities.  Farmers can sell down their 'dry' shares as and when they like, but not all farmers hold those shares.

Thanks CO, I wasn't fully aware of this given the conversation I had last year with a couple of dairy farmers. Perhaps they were the lucky few that held "dry" shares with Fonterra?!
 

milk price was $5.8 and $5.9 for 2011/12 and 2012/13 seaons as US, EU, AUS and NZ all had great milk productions.
 
Depending on this summer, if no extreme climatic events in NZ to drag down productions, i m afraid $6 or even a bit lower is a pretty good guess. 
 
 

And here's Westland Milk Products' forecast;
Westland Milk Products announces 2014-15 pay-out prediction
New Zealand’s second largest dairy co-operative Westland Milk Products has announced a pay-out prediction of $6 to $6.40 per kilogram of milk solids (kgMS) before retentions for the 2014-15 season just commenced.
The company has also kept its pay-out prediction for the 2013-14 season at $7.50 - $7.70 per kgMS before retentions.
Chief Executive Rod Quin says Westland’s predicted pay-out is in line with the predictions by other New Zealand companies, all of which are experiencing the same international market conditions.
“The decline in pay-out for 2014-15 is due to lower international dairy prices and the relatively high New Zealand dollar,” Quin says. “The market has continued to decline as customers limit their purchases due to higher inventories in their supply chains, and growth in milk and dairy product supply from Europe and the USA.
“What we have to consider is whether we are at the bottom of the price cycle, and here the signs are slightly more encouraging.  There are indications that customers are buying more than prior months to refill their supply chains.”
Quin says that some industry commentators have speculated that the weakening New Zealand dollar might off-set the impact of lowered dairy prices and therefore benefit pay-outs, but he cautions that, to date, the decline in the dollar has been very small and the currency remains over valued.
“Westland’s response to this situation is to continue its strategy to grow its capacity to produce higher value nutritional products such as infant formula,” Quin says. “Our traditional reliance on bulk dairy commodities makes us more vulnerable to the cyclical swings of the international dairy market. Our recently announced investment in a $102 million nutritionals dryer at Hokitika will give us the capacity to shift more of our production to this end of the market where profits are higher and opportunities to lift pay-outs are better.”