ANZ cuts its Fonterra 2014-15 milk price forecast to $5.25/kg MS, which would represent a $5.1b annual drop in farmers' revenue

ANZ cuts its Fonterra 2014-15 milk price forecast to $5.25/kg MS, which would represent a $5.1b annual drop in farmers' revenue

ANZ's economists have cut their 2014-15 Fonterra milk price forecast by 50 cents to $5.25 per kilogramme of milk solids after the latest drop in prices at Fonterra's Tuesday night dairy auction. At the same time BNZ has cut its forecast by 30 cents to $5.50.

ASB's economists have their $5.80 forecast under review, and Westpac, which also has a $5.80 forecast, sees downside risks.

Just last week Fonterra reiterated its milk payout forecast of $6.00/kg, for the 2014-15 season, and held its dividend estimate at 20-25 cents per share.

The latest globaldairytrade auction saw prices fall 6% in US dollar terms, and 4.7% in NZ dollar terms. The big falls were for skim milk powder which dropped 9.5% to US$2,600/tonne. Butter fell 5.6%, cheese fell  4.9% and whole milk powder (WMP) dropped 4.3%. Overall, Trade Weighted Index (TWI) prices are now down 44% since the peak in February, with milk powder prices down 47%.

"We have cut our 2014/15 milk price forecast again to $5.25/kg MS (from $5.75). Dairy price action remains weak, with forward curve pricing into the peak of the NZ production season soft. Question-marks surround China’s inventory situation, and European production needs to find a home elsewhere given Russian sanctions. It’s a poor combination," ANZ economists Cameron Bagrie and Con Williams said.

"If our revised forecast materialises, it represents an approximate $5.1billion, or 2.2% of GDP, hit to dairy revenue compared to last season. The hit to cash-flow isn’t as bad as the headline numbers, but it’s a hit nonetheless," Bagrie and Williams added.

They also said that although the long-term picture for dairying hasn’t changed, current developments reinforce the old adage that “what goes up must come down”.

"Mechanically putting a milk price of $5.50/kg MS (incl dividend) into our average farm model yields a break-even result, though there is huge industry divergence around that figure. While farmers are still backing an improvement in prices later in the season and cash-flow looks better than the headline result it’s unlikely to be slash and burn," said Bagrie and Williams.

"But the cheque-book will be put away and a reduction in advance rates come Fonterra’s next update would now shift this reaction into more extreme territory. The key for whether financial stress might start to emerge will be the outlook for 2015/16. If there is another skinny year this is where cash-flow starts to dry up. At present we have a milk price forecast of $6.50/kg MS, which would avoid such a situation. But we’re on notice."

The latest auction prices  technically translate into a milk price around the mid $4’s kg MS mark, highlighting a $1.50kg MS gap, Bagrie and Williams said. But, they added, year-to-date prices achieved are higher than this thanks to better results earlier in the year.

"But this highlights the potential downside risk at present if prices do not recover." Here's ANZ's full report.

BNZ's downside risk

BNZ senior economist Doug Steel has cut his forecast to $5.50 from $5.80. He describes this as "a view that still has downside risk as it is dependent on a substantially lower NZ dollar (our view), and/or a decent bounce in international prices." Steel said BNZ doesn't see a material pick up in prices until into next year.

 

Meanwhile, ASB's economists said after the latest auction results their $5.80/kg milk price forecast is under review.

"The risks to our $5.80/kg milk price have clearly moved to the downside. Indeed, the risks are even more obviously down for Fonterra’s $6.00/kg forecast, which Fonterra reaffirmed just last week," ASB's economists said.

"All up, we maintain our forecast for the 2014/15 season at $5.80/kg of milk solids. However at this juncture, we move our forecast to 'under review' and keep a watchful eye on upcoming dairy auctions and other dairy market developments."  Here's ASB's full report.

And Westpac senior economist Anne Boniface said the risks to Westpac's $5.80 forecast are "clearly skewed to the downside." She also noted Westland's recently made $5.40-$5.80 KgMs before retentions forecast.

"Fonterra will have another opportunity to update the market on its view at the end of this month, when it announces its financial results and the final payout for the 2013/14 season. Given recent price action, a downgrade to Fonterra’s forecast would come as no surprise," said Boniface. Here's Boniface's report.

'The long-term market fundamentals remain sound'

Fonterra chairman John Wilson said last week the co-operative's decision to hold its 2014-15 forecast at $6 reflected the longer term outlook for international dairy prices.

“Current market views supported by our own forecasting indicate commodity prices improving later this year or in early 2015, with global demand for dairy continuing to grow year on year," Wilson said.

“While the long-term market fundamentals remain sound, we need to recognise that the current market conditions are difficult and there remains further downside risk."

“There is still volatility. This reflects challenges with supply and demand following a good dairy season globally.  Given these factors, the forecast is our best judgement at this time," Wilson added.

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

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?

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.

45 Comments

Comment Filter

Highlight new comments in the last hr(s).

.... fear not oh timorous wee economic beasties , we still have our rip roaring property boom to tide us over , and make us all uber rich ....
 
Waddaya mean house prices fell $ 15 000 last month in Auckland ????
 
.... shagggggggggggggggg !

Aussies are doing the same: RBA delivers cheap credit to inflate housing as "replacement" for minerals receipts (save they don't export houses)..
As for fontera's advice to budget; most cockies big ticket items like debt servicing, sup. feed costs, rates, insurance,power, r&m and labour etc, are not optional. More likely fontera will borrow $ to pay out - just a book entry, so much tidier and then there is always the Government balance sheet to fall back on.
Ergophobia  

you missed petrochemical phosphates and nitrates

or was that sup. feed

Ooh, Errr.
per KgMS:
Revenue $5.50
FWE $4.00
Debt $20
Interest @ 5.5% $1.10
Does not sound like Good News for the purveyors of Feed, Fencing, Tractors, Implements, Robots, Barns, seed.......
 
And when Sales = COGS, ye cannae make it up on Volume.....
 
I suspect the accompanying soundtrack should be Doors:  'When the Music's Over"

This is serious. Liked your music choice
 
And now I offer you the most beautiful 'anti-volume' song of all time
https://www.youtube.com/watch?v=dd3btVhwr48

Talk about steering me into small circles!
 
Thanks...Knopfler was of course the guitarist on Dylan's 'Blind Willie McTell' - inexplicably left  off 'Infidels'...
 
Perhaps (back to DairyLand)  it's a case of 'Baloney Again...'  from the pick of the culls, natch.

more SRV
https://www.youtube.com/watch?v=iTUYKHOdHCc
When we believe in things that we don't understand, we will suffer
bags not be the economist
 

Interesting that the latest drop only rates a small mention in the news. I would have thought the accumulating dairy price drops are a major disaster for the nz economy? Banks must be sweating.

Waymad  - Interest @ 5.5% $1.10? Should that not be higher?

All large loans (and dairy is usually large $) are individually negotiated.  You're probably thinking of retail/headline rates.  

5.5 is residential secured,  only government/council get lower rates.
think you'll find most business (eg farms) start at 6 minimum and go to 12+ 

What is this going to do to water quality?  Improvements when milk was riding high were minor and weren't helped by John Key bad mouthing our scientists. http://e2nz.org/2011/05/10/bbc-hardtalk-roasts-key-on-100-pure-image/
Now that farm costs are going to get slashed National will need to send Nick Smith out to Niwa and tell them to shut up else their funding will be cut a la Fish and Game.
 

I suspect Nick is already well ahead of you on that. And Amy Adams with the Ministry for the Environment.

whilst I don't necessarily agree with their lib dem politics the greens are allthere is. I imagine a future where the environment is the defining factor across all political spectrum. I might even vote for a status quo party if that means saving the ecology. f the economy man needs to grow the ecology.

the other way around, work can't be done on the ecology, without income from the economy.  It simply can't be spent if the income isn't there.

Nope.  Our economy is grown purely on the back of our ecology.  Without our ecology there is no economy.
 
This always seems so obvious to me but people really struggle with this concept.  The economy can't grow without exploiting the environment.  We can't save the environment until we can exploit the environment more effectively.  I really don't understand how you can hold this view?

You are talking rubbish.  You are talking utter irrelevant bollocks. 

It is obvious to you and others dont "get it" because you are making foolish statements.

We have an ecology.  A garbage dump has an ecology.  Even the dead zone 1m around around the top of a hydro power lake has an "ecology".

What you are ask for is change.
Where do you think the money to pay for materials and manpower to enact change are going to come from?

"The Ecology" isn't going to provide manpower.

As for "exploiting the environment" ... you'd have to be a complete one-eyed moron to believe that.  Economy can grow harmonising the environment - IF consumers are willing to pay for that, but if the CONSUMERS won't pay for services which include harmonising the environment then there is no resources available to carry out any work.
 If this is not true then I have a piece of ecology - you, yes you, personally travel down and without pay or resources, you improve it.

If I am right, then provide me equivalent of $8 dairy payout and I will show you how that money can be spent improving the ecology.environment.

Now which of those two mutally exclusive scenairos test true?
EITHER:  If you provide enough money, I can afford to do work that doesn't have ROI that improve the ecology impact,
OR: You will come and without any supply of resources improve the ecology and from that we will get some kind of economic payout (yes, if you are right we'll split the profit).

cowboy's hard test time, put up real solid testable proof, or shut up and foo - as your nonsense is incorrect and damaging to others

the ecologies of the planet evolved before man's economy existed and will continue long after man's economy has disappeared. The bit in the middle is what I want to sustain for as long as possible - without a viable ecology there will be no man and no economy.

How is the Atlantic North Western Cod economy going these days?

http://en.wikipedia.org/wiki/Collapse_of_the_Atlantic_northwest_cod_fishery
 

same challenge for you as the other clown.
You come and make the changes with no money and resources.
Put up or shut up.

I guarantee you, provide me the resources, and I can afford to the work.  No resources (ie cash) then I can't hire the experts or pay the staff or get the materials simple as that.

Cause if I'm wrong we have profitable farmers and employed people, and the bleeding hearts can still improve the ecology.

But if you eco nuts are wrong, then not paying for the product in a manner which allows the work to be done, and trying to force the work to be done, will result in peoples businesses collapsing, no work done, destruction of their equity.   At best the businesses will be forced to borrow money from banks to do the work, and spend many years in debt trying to pay back the costs.  Or those who cant afford to do the work will be brought out by the large corporations who have the pockets to take on multigenerational debt and/or enough clout to raise prices on you.

Perhaps that is your game?  You talk ecology but you're really just pushing more debt and corporate ownership.

You see I'm not talking theory or philosophy or some academic shit.  I'm down here, with debt and dirt on my hands DOING the work.  You're trying to argue with someone who's actually _doing_ the job.

 

as proven by the latest gDT prices.

the customers aren't interested in paying for environmental initiatives.
the customers (and government) aren't interest in making sure that fair returns are provide on farm for safety and waged labour.
the customers don't care enough about paying for "top quality" product.
the customers have no interest in paying more for the reduction in sanitiser.
the customers have no interest in paying the higher rate that low stocking levels will require.
the customers aren't interested in paying the cost recover for "smart farming" or high levels of documentation.

The customers want _cheap_ as PROVEN by gDT sales.

and without the cash from decent gDT there can be no extra environmental work  And that's not a theory or philosophy, that's facts.

Being honest with you cowboy, from the outside it looks like Fonterra suppliers want to sell cheap milk. Why else produce a commodity product?  Then increase production when prices are high only to pay the price when supply meets demand. Confuses a lot of us on the outside looking in..
 The auction system is great on the way up, on the way down it's a great leveler.

Fonterra _suppliers_ want to maximise their profits.
But Fonterra _supplies_ are the ultimate in price takers*, as Fonterra is the one writing the invoices and making the decision on how much they will pay.

* Remember the article a few days ago on Fonterra's credit rating drop.  It essentially stated that Fonterra's corporate risk taking was getting out of hand, but as long as Fonterra could subsidise itself by paying it's suppliers less that was a sold asset that kept the company afloat.

The commodity product issue is a holdover from the merger process.  The Taranaki and Waikato "plains of white gold" dairy companies went for bulk production.  Many of the smaller coop processors were winning awards for premium cheeses and butters and researching into other areas of final products (such as waste to plastics).  When the merger occurred it was the big volume that voted (kgMS) not the suppliers (people).

The customers want _cheap_ as PROVEN by gDT sales.
and volume - location non-specific:
 
eg. 1
Australian dairy companies are eager to boost milk production to capitalise on Asia's fast-growing middle class and keep its spot as the world's fourth-biggest milk exporter.
Mr Droppert said milk processors such as Murray Goulburn, Fonterra and Bega were introducing a range of programs to encourage farmers to increase supply, from helping them buy more cows and update dairy equipment to attracting external investors to buy and lease farms.
Read more: http://www.smh.com.au/business/marketing/stop-poaching-start-churning-insider-warns-milk-industry-20140903-10bh77.html#ixzz3CHuqUEEO
 
eg. 2
Danny Armstrong, General Manager of China Banking with NAB [and BNZ], speaks to Ticky
http://www.abc.net.au/news/2014-09-03/extended-interview-with-danny-armstrong/5717996
see the similes at 6:35 onward at the thought of Fonterra taking a slice of Murray G.
 

not seeing any programs to increase supply or equipment here - only punitive stuff designed to cost farmers money.  I'm currently trying to replace gear that is around 40-50yrs old, and it's not my gear, so the dropping payout really isn't supporting #1.

Again, though, are we seeing the people with money from outside dairying cross-subsidising a few operators?  Are we again seeing people who have had the opportunity to fatten their wallets on capital gain and the golden age of dirty dairying, cheap inputs, and nasty shortcuts cutting their price to not include any asset/capital/rent costing (aka anti-competitive behaviours)??

Because if you are right Henry, then the processing company is boosting some suppliers businesses and the cost of others.... hardly the co-operative model...

Having read the article... in fact if anything, in NZ we are being pressured to -reduce- stock levels, not increase them.

No use bleating about it now when costs are getting slashed. Why wasn't something done about it when the cocky was riding high instead of just driving up farm prices by buying the neighbour. Lets face it the rivers have been stuffed.

With a land based operation like dairy farming where access is a critical factor (animals walking to dairy and back)  why wouldn't a farming operation buy up a neighbour whenever possible?  And the value to a neighbour is far in advance to anyone else.

 And they're not "riding high"  we're only just, Aug and Sept, seeing any benefit from high payout, most of which must be put into IRD's coffers for GST and Terminal tax.

To quote John Key from last night's town hall debate, "I feel we're on the cusp of something big" (or something along those lines).
 
How many more Fonterra auctions to election day?

One gDT auction (the 16th but we won't see the results till early the 17th) and one set of REINZ data (probably mid to late next week) before the election.

Do you get that sort of near terminal shock (i.e., as per when Britain joined the EEC in 1973) type feeling, Colin?

What I have said to people is that within the limits of my experience NZ is facing the most challenging set of factors since our economy came close to collapse in 1984.
 
I think it is likely that this time a larger percentage of the public are well informed than in 1984 but it worries me that our political and administrative leaders are locked into rigid belief systems. I fear that our current political elites simply don't have the abilities or competencies that will be required. 
 
Charles Hugh Smith is clear on the problem and the outcome. I think that what matters is how we get there:
http://www.oftwominds.com/blogsept14/QE-reform9-14.html
 
The author's conclusion is true not just of Japan but of every nation from Greece to the U.S. to China that is trapped in the self-liquidating cycle of protecting its entrenched elites, cartels and fiefdoms:
 
Japan will eventually reform and revive. Its tragedy is that it is filled with smart, ambitious, creative individuals who are trapped in once vibrant but now ossified political and economic institutions.

i agree with you. I think the govt paints a rosy picture of a booming economy. But i think they are really just trying to avert disaster by keeping the lie going. I think people have forgotten that downturns are healthy for markets. If the world has too much milk why try to keep pushing dairy production? Won't this just put more downward pressure on price? Cut production, cut costs, the price will improve ( the environment will improve), isn't this just simple supply and demand economics?

So that we can blame the Govt for what price the market is prepared to pay for dairy in the short term Kate?

From where I sit, it looks like foreign processor companies are talking there milk inputs, paying their suppliers a good price - and then when there's excess left over the sell it cheap on the gDT.  Based on what I read about the Chinese big farms "getting twice the NZ payout" and from what some Aussi's are telling me (they get a little more than we do, but in AUS$) - not counting government subsidies and other tranches.

So our "top market" is everyone elses commodity flea sale....  which would explain why quality improvements mean nothing.

What type of hit will this do to the government books? I think we need to take a breather from the Hagar story and get to be told how each party would be addressing a potentially large shock to revenue else we will still be talking about Punch and Judy come the 20th.

Good thought smalltown, let's look at what the LG coalition have effectively stated in policy that they will do to assist the country through this downturn in dairy, to really help out farmers,  growth and jobs - raise the top tax rate, implement a CG tax, change the labor laws to give the unions more muscle, start charging farmers for water, raise the emmission standards on farmers, raise the minimum wage, restrict immigration - I'm sure I've missed one or two of their other brilliant growth and job driven ideas - we get the Govt's we deserve

Indeed, SmallVillage.
 
When sales = COGS, net taxable income = zero, tax take from dairy will = zero....
 
One doubts that the LabGreenManaiacs financial astrologers have figgered out This equation, but of course their Spending plans are predicated on Lotsa Moolah......so selective amnesia is helpful.

All three links are from before dairy commodity prices fell. I doubt we will see any of them reproduced with sub $6.00 payouts.
 
I wonder how any of those who may have invested are feeling now?

If we had nurtured a huge and thriving internet/tech sector in our economy, we would be in a better position, ie, not so frightened.  Heartbreaking

Still woulda been gazumped on price/cost by Bangalore etc.  This sector (I work in it) is international, globalised, and largely immune to Gubmint forces:  if a firm does not like current local settings, it can oh so easily move.  In fact it would be hard to tell if one Had....

I was not referring to "call centers", but, for intance, using the TeWai Point electricity to power massed server farms. We could keep our Kiwi tech start-ups here at home (instead of heading to Seattle, Sydney or London) AND attract overseas start-ups and small tech companies to NZ. You would know from your experience that tech people (I am generazlizing) like the Seattle type of vibe (coffee shops, the bush, high fashion, mountains, bike lanes, sailboats, decriminalized weed and a modern/inexpensive internet. We have everything EXCEPT decriminalized weed and good/cheap internet. Dunedin could have funded a second internet cable to the USA for the money we blew ($350,000,000) on our  empty giant plastic yurt (stadium). go figure. Lets just become destitute and see how it feels?

Your (youthful?) exuberance is wonderful to behold, but have a think about the business risks inherent in sitting cloud data stores on a tectonic plate boundary......

Hey there young fella. Us old heads would build server farms on stable southland geology and wire the electricity and internet to them.