There's likely to be downward pressure on prices at tonight's Global Dairy Trade (GDT) auction with Fonterra probably set to lower its 2014/15 milk payout forecast at its annual results meeting next Wednesday, ANZ economists say.
With GDT prices down almost 45% (in US dollar terms, 46% in NZ dollar terms) since peaking in February, tonight’s auction has added importance coming ahead of Fonterra’s annual results announcement next Wednesday, they point out.
"We’re yet to see a trigger for higher prices, with global supply continuing to weigh including the re-routing of European product following Russian sanctions, while Fonterra is also likely to be accumulating inventory by limiting supply to the GDT platform, which will need to be shifted later in the year. US milk powder futures have fallen a further 10% in recent weeks," say ANZ's economists.
"Therefore, we see downside risk to prices at tonight’s GDT auction and expect Fonterra to lower its 2014/15 milk payout towards our estimate of $5.25/kg MS from $6 at next week’s annual results meeting," ANZ says.
"Further weakness in global dairy prices is also likely to weigh on the currency, which could see NZ dollar-US dollar test February’s low of US80.52 cents in coming weeks. We’re cognisant that both Fonterra and the Reserve Bank of New Zealand are expecting dairy prices to bounce back by year-end. (But) the risk now is that any recovery in prices is delayed until early next year. The impact of a lower dairy payout is likely to quickly permeate through the rural economy."
In late August 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 last GDT auction, subsequent to Fonterra's announcement, saw prices fall 6% in US dollar terms, and 4.7% in NZ dollar terms.
After that ANZ cut its 2014-15 Fonterra milk price forecast by 50 cents to $5.25/kg, and BNZ cut its forecast by 30 cents to $5.50. ASB held its at $5.80, as did Westpac.
With its annual results Fonterra is expected to announce its final payout for the 2013/14 season, with its current forecast for a record payout of $8.40 per kg MS, with a dividend forecast of 10c, giving a total forecast payout of $8.50.
A drop from this to $5.25 would represent a hit equivalent to about $5.1 billion, or 2.2% of GDP, to annual dairy revenue, ANZ says.
7 Comments
It will surely highlight the fragility embodied in the agricultural debt mountain - are the indebted dairy farmers able to get out from under it using their own internal resources or will you and I be called upon to rescue the situation?
I don't like the way the EU is starting to store product, another dairy mountain being formed in front of our eyes.
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"Within a month of Russia implementing the ban, European dairy prices have fallen sharply with little signs of slowing," says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle. "European milk buyers have been lowering prices paid to farms to try to stem the flow of milk in coming months as world dairy prices continue to show weakness."
Extraordinary circumstances
Late last month the European Commission announced a plan to open Private Storage Aid (PSA) to provide emergency market support to dairy products. Last week the commission presented the measure to EU member states and the European Parliament for a vote.
"This could buy some time for European countries to find new outlets for their products," says Dorland. "However, it could fall short of providing longer-term price stability because the product will only be taken off the market temporarily." Early next year, the stored product will likely be released into the marketplace, she adds.
If Russia isn't taking the European product, what else are they supposed to do with it?
And since we can't sell to the Russians without risking offending the Europeans and causing them to dump their product for under cost (to recover what they can) in our markets... what do you think is going to happen to the European product?
With its annual results Fonterra is expected to announce its final payout for the 2013/14 season, with its current forecast for a record payout of $8.40 per kg MS, with a dividend forecast of 10c, giving a total forecast payout of $8.50.
The chance of Fonterra shareholders receiving $8.50 net is remote. They should be prepared to be disappointed. If the net final payout is a disappointment then there should be serious questions looking for answers.
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