Fonterra cuts payout forecast for 2014/15 to NZ$4.70/kg from NZ$5.30/kg; NZ$ drops half a cent to 76.6 USc

Fonterra cuts payout forecast for 2014/15 to NZ$4.70/kg from NZ$5.30/kg; NZ$ drops half a cent to 76.6 USc

By Bernard Hickey

Fonterra has slashed its forecast payout for the year by 60 cents/kg or over NZ$6 billion, driving the New Zealand dollar down, challenging the Government's budget surplus forecast and pushing at least a quarter of farmers into financial strife.

Fonterra's board has announced it has lowered its forecast milk price for the current 2014/15 season to $4.70/kg from $5.30/kg, but it has held out the prospect of topping up its current dividend forecast of 25-35c per share with cash saved elsewhere in Fonterra.

If the payout forecast is confirmed, this would be Fonterra's lowest milk payout since the $3.87/kg paid in 2006/07. See our history of New Zealand payouts here.

The revised forecast was broadly in line with economist expectations, but not as low as some are still forecasting for the 2014/15 year. AgriHQ is currently forecasting a payout of $4.25/kg and has said that a payout of $3.65 is possible if prices do not rebound through the second half of the financial year as most still expect. The New Zealand dollar dropped half a cent in morning trade to 76.6 USc on the news.

Economsists estimated a resulting reduction in national income of over NZ$6 billion and Dairy NZ estimated a reduction of NZ$6.8 billion. It also said it expected a quarter of farmers faced some business risk this year.

"That means they will have difficulty meeting their interest payments, rent and farm working expenses without incurring more debt," Dairy NZ CEO Tim Mackle.

Elsewhere, Treasury warned that the low dairy prices would add to downward pressures on tax revenues after it reported a budget deficit of NZ$1.0 billion for the first four months of the 2014/15, which is supposed to finish with a surplus.

'Supply more than demand'

Fonterra Chairman John Wilson said farmers had been expecting the lower forecast, but it would still put pressure on their budgets.

Wilson said global milk supply remained greater than demand.

“Falling oil prices, geopolitical uncertainty in Russia and Ukraine, and subdued demand from China as it continues to work through inventory are all contributing to ongoing volatility and weak demand,” Wilson said.

“Today’s revised forecast reflects the Board and management’s best estimates at this time. Given the uncertainty we are advising farmers to continue to be cautious with budgeting and we will update them as the season progresses," he said, adding that Fonterra would review its dividend forecast after its interim result early next year.

Chief Executive Theo Spierings said Fonterra was undertaking a targeted programme to generate more cash to support farmers.

This suggests Fonterra could use its balance sheet and its cashflow for this year to top up its dividend payout. It cannot use its balance sheet to change the milk payout, which is set according to Dairy Industry Restructuring Act rules. This would mean suppliers who were not shareholders would miss out on the cash support.

“Cash is important for our farmers and for our Co-operative,” Spierings said.  “We will be further strengthening our tight controls on operating expenditure, and will be driving harder on working capital, and deferring capex – provided this does not slow progress on our V3 business strategy. This is a clear signal to farmers that we are all in this together.  We are tightening our belts, just as they are," Spierings said.

$6.1 billion hit

Westpac chief economist Dominick Stephens said so far rural confidence has remained surprisingly robust in the face of falling payout forecasts.

"The general sentiment has been that farmers can weather one low payout. We suspect that the reality of a payout as low as $4.70 is going to dent that confidence. What is more, we are now forecasting a fairly low farm gate milk price of just $6.20 for the 2015/16 season, and that is assuming that global milk prices rise rapidly over 2015," Stephens said.

"The drop from last season's $8.40 farm gate milk price to $4.70 is equivalent to a reduction in income of $6.1 billion for the New Zealand dairy industry, or 2.7% of GDP."

Meanwhile ANZ's economists said Fonterra's new forecast means all up a 100% share backed farmer is forecast to receive $4.95-5.05/kg of milk solids (MS). However, they point out the forecast still requires an assumption of an improvement in international prices in 2015, meaning downside risk remains.

"While cashflow at $6.03/kg MS for a fully share-backed farmer in 2014/15 isn’t quite as bad as the headline figures, it is set to tighten dramatically in the middle of 2015," ANZ said.

"This update begs the question: at what milk price does financial stress in the sector start to increase? There is no simple answer, with a wide range of businesses and leverage within the sector. From a cashflow and financial stress point of view the bigger risk lays around the 2015/16 season."

"The industry can manage one tough year, but two years of a sub break-even payout would become problematic and entail material economy-wide consequences," ANZ said.

 ANZ is forecasting a milk price of $6.50/kg MS for 2015/16, but sees downside risks to this.

ASB sees lower dairy demand from oil producers

ASB's economists said they've cut their 2015/16 Fonterra forecast payout by 50c to $6/kg due to "lingering" dairy price weakness.

"We had been expecting some recovery in dairy prices next year. However, factors that have been weighing on dairy prices this year are taking longer than expected to reverse course. Meanwhile, lower incomes for oil producers are likely to subdue their demand for dairy products. Nevertheless, we maintain very positive about the long-term demand for dairy and expect prices will recover to a relatively high level," ASB said.

Pain in September 2015

BNZ Economist Doug Steel said the cash impact on the economy was only just starting and would tighten considerably through from May to September 2015.

"It is also worth noting that farmers appear to have saved a good chunk of the record payments associated with the previous season. Agriculture bank deposits are up nearly $1.5 billion over the past 12 months," Steel said.

BNZ was maintaining its $5.70/kg forecast for 2015/16 as a lower New Zealand dollar lifted incomes before a general improvement in dairy prices in the second half of 2015.

(Updated with NZ$ move, DairyNZ comment, Economist comments).

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29 Comments

I reckon this falling commodity price is what will bring us all back down to earth yet .
The unearned windfall  income that Auckland homeonwers have recieved and are borrowing against to spend and thereby  ramp up the economy is all smoke and mirrors .
We need to realise  that our real economy is what we produce and export , not specualtion in houses

It does seem particularly peverse that as our "real" economy (i.e. milk powder) comes crashing down, house prices continue their inexorable rise. It's not just Auckland either, there's plenty of craziness around the rest of the country.

I note from an article on Dairy HQ (NZ Farmer Weekly) that the Chinese purchased 25000 tonnes of WMP in October 2014 versus 87000 tonnes in October 2013. We know that the Chinese purchasing of Milk Powder over the 2013/early 2014 went berserk for some reason...so I dont know what is the long term averge WMP that they purchase on a monthly basis BUT I keep hearing from Fonterra officials that the Chinese are not purchasing when clearly they are, allbeit at record low prices. These purchases (25000 tonnes in October) are topping up the stockpile that they already have. The point I am getting too, is given these, when will demand put pressure on the supply curve to improve the price, because on top of the above, we also have the following additional Milk Powder capacity coming on stream destined for China:Glanbia (Ireland), Arla (Denmark), Sodiaal (France) Freisland Campina (Holland), DFA (Nevada and Kansas)...(just do a google to check facts)
I had to have a chuckle when the Chinese Premier visted recently, he stated that "the only thing New Zealand has to worry about is whether we can produce enough Dairy products to satisfy rising demand in China"...I am sure China have a policy of spreading this message to all dairy markets knowing very well what impact this message will have on "Supply" in the "free market" west...their monthly cheque is much easier to sign when they are paying $2200 per tonne for WMP instead of $5000 per tonne. Very clever.

The Chinese Premier is smart enough to imply "at a price low enough for us to want to pay".

There are plenty of Chinese owned factories and farming systems in NZ coming on line shortly, so they'll be exporting back to the homeland at record low prices, and capturing value in the last leg in China.

Yes, the Chinese brought up big, but they had several other deals going on at the time, and Fonterra just had the political poison pill of TAF to force down their shareholder-suppliers throats, so they needed something to seal the deal.  Mega first orders use to be very common in the computer and electronics industrys, and many of the crowdsourced/kickstarter/indiegogo projects I've help with find that mentality when dealing with their Chinese manufacturers - the first shipment/order is always expected to be big and at full margin, then you get the dreck. (because the big volume sale isn't there so it doesn't look as good to their bosses - opposite to how it is in private capitalist business where steady repeat business is the goal)

Interesting! It was mentioned at a agri bank presenttion that I attended recently that Chinese Officials asociated with the large purchase have lost their jobs...(???) also mentioned, which I thought was very interesting was "in all honesty the bank has very little visibillity into supply and demand of dairy products in China"...this is bloody scary, John Key and National are banking their whole economic strategy on supplying a market that we have very little idea about...probably why not one bank economist or fonterra official managed to forecast this disaster.

could be turns out they still are old school indeed.
 
http://online.barrons.com/articles/anne-stevenson-yang-why-xi-jinpings-troubles-and-chinas-could-get-worse-1417846773?tesla=y&mod=djemb_mag_h
Of the same piece is China’s attacks on foreign companies and brands on the grounds of claimed antimonopoly practices, discriminatory pricing, corruption, and inadequate product quality. Chinese state-owned companies and firms in which party members are invested, however, are largely exempt from such scrutiny. In a state economy like China’s, the playing field is increasingly tilted so ultimate gains go to Chinese companies.
As for Xi’s much-ballyhooed anticorruption campaign inside China, it offends me that international media depict it as a good-governance effort. What’s really going on is an old-style party purge reminiscent of the 1950s and 1960s with quota-driven arrests, summary trials, mysterious disappearances, and suicides, which has already entrapped, by our calculations, 100,000 party operatives and others. The intent is not moral purification by the Xi administration but instead the elimination of political enemies and other claimants to the economy’s spoils.
 

Henry, a very good link - so long as you are not into spinning NZ's asset bubbles.

I agree what puzzles me is why our media and government seems to be completely on board with this,  Are they being threatened? Bribed? Stupid beyond all belief?

I'd heard also that those people had been disgraced and moved to smaller offices for their lack of care in filling their quota, given that they could have done so at a much smaller price.
 However, I have a sneaking suspicion that they may have been moved because they have knowledge on why such a deal was signed off without the usual level of management inspection to stop such accidental excesses.   Although everything points this being due to Fonterra's _repeated_ embarassment of low quality mistakes after it had falsely claimed to have extremely good practices.
  And since Fonterra had already setup factory farms and bought into several processing companies with money and IP then the usual decision is that the majority of expertise had been gained and the local assistants were now able to operate the business for Fonterra with a little oversight from local officials.   If you've worked with media and design runs through China, you'll know exactly what I'm talking about....    

But now such foolish mistaken extravagenza have been dealt with, and now new, reasonably priced contracts can be re-assessed now that the needs are "more correctly" identified.  No, they accept the fault, and do not wish to blame us for our lack of caution and understand our over-enthusiasm and as such will not ask for remittance and refunds as they are fair and reasonable people and as we are genuine professionals who understand these matters.
   However such matters were irresponsible; from juniors who overstep the mark and a new contract will be presented as soon as fair and proper consultancy of all available suppliers.  They apologise for any expense that we may have occurred in anticipation of future business at that price and assure us that that was not their intention to mislead us.

Yep ... heard it all before.
Even stated it, as did many others farmers and manufactures that the price was "too high", unsustainable, and not fitting the shape-price of Chinese bulk consumers.  "There is a catch" we said, "they must want something else" they said, "It's a trap" we said.
 Infinite demand and our best friend is Chinese and you're all racists they said to us.

so why haven't the NZer's involved in the price drop lost their jobs?

I'd heard also that those people had been disgraced and moved to smaller offices for their lack of care in filling their quota, given that they could have done so at a much smaller price.
 However, I have a sneaking suspicion that they may have been moved because they have knowledge on why such a deal was signed off without the usual level of management inspection to stop such accidental excesses.   Although everything points this being due to Fonterra's _repeated_ embarassment of low quality mistakes after it had falsely claimed to have extremely good practices.
  And since Fonterra had already setup factory farms and bought into several processing companies with money and IP then the usual decision is that the majority of expertise had been gained and the local assistants were now able to operate the business for Fonterra with a little oversight from local officials.   If you've worked with media and design runs through China, you'll know exactly what I'm talking about....    

But now such foolish mistaken extravagenza have been dealt with, and now new, reasonably priced contracts can be re-assessed now that the needs are "more correctly" identified.  No, they accept the fault, and do not wish to blame us for our lack of caution and understand our over-enthusiasm and as such will not ask for remittance and refunds as they are fair and reasonable people and as we are genuine professionals who understand these matters.
   However such matters were irresponsible; from juniors who overstep the mark and a new contract will be presented as soon as fair and proper consultancy of all available suppliers.  They apologise for any expense that we may have occurred in anticipation of future business at that price and assure us that that was not their intention to mislead us.

Yep ... heard it all before.
Even stated it, as did many others farmers and manufactures that the price was "too high", unsustainable, and not fitting the shape-price of Chinese bulk consumers.  "There is a catch" we said, "they must want something else" they said, "It's a trap" we said.
 Infinite demand and our best friend is Chinese and you're all racists they said to us.

so why haven't the NZer's involved in the price drop lost their jobs?

Thing about farming and farmers is that they are used to the business cycles, which is exactly what we're seeing here.  
 
So IMHO there's nothing to get terribly excited about.  Creditors and lenders know that monitoring of their investments is needed:  cash flow forecasts will be tightened up, the capex will be reined in, drawings will go down, and the wilder excesses of retail will be squeezed as rural shoppers stay home.
 
But farmers essentially control their income and lifestyle in four distinct ways:

  • By choices as to product mix:  WMP may be down but sheep and beef is up and cropping is steady.  Grazing and run-off blocks can be used either way.
  • By choices as to technology:  robot shed/feed barn configurations don't have a seasonal milk curve as one example.
  • By choices as to use of labour:  more SM's, fewer managers, more casuals, more family members roped in to apply the cups
  • By choices as to recreation:  ya can go fishing on the quad-bike, rent out the farm cottages to hapless Euro travellers, take off in the Landcruiser to the back-country lakes or go skiing in the winter months when the coos are dry.  Lotsa choices and lotsa plant to do it with, all expensed as FWE.

As Adam Smith observed "There is a great deal of ruin in a nation' - meaning that there is an inventory - plant, soil fertility, livestock, and stock in general - which can be drawn down during the hard times.
 
We have a great inventory to draw upon, not least the steady pragmatism of our farming communities....glass is half-full.
 
But what Will go down the tubes is likely to be unsettling outside the rural powerhouse:

  • zero tax take from affected ag as Sales = COGS and earnings after interest and depreciation are essentially zero.
  • consequential effects on Gubmint and TLA budgets
  • less momentum possible on environmental efforts:  they are capex-intensive in general and capex is the first line item to be stopped.
  • less labour opportunities as currently slack resources are pressed into play (pressed here having its old meaning, rounded up out of the public houses and politely requested to Sail)

Careful wotcha wish for.....

Adam Smith formulated his thoughts during a time and in a country where white property owners had slaves, women had no part in decision making and there was no such thing as Communist China using its collective and totalitarian might to wrest the world of its wealth. His thoughts have no relevance in the politics of today
Oh and btw glass is more likely half empty if that is milk in it. This time on the way UP to $8 kg was when it was last half filled

All family members are required to have labour records now.

Not just near zero tax take, but carried over loses, and on current payout possible farm walkoffs.

We aren't seeing any reduction on environmental fronts.  Message from the chair warmers is that "they're tired of waiting" and "councils are out of patience".   so much so that this mornings news showed a farmer prosecuted for routine maintenance on a silted drain/creek.

And whispers in the wind are that there will be even heavier crackdowns coming re:labour.  For hours worked, recording everything, training course attendance (at employers cost), in order to bring down the farm injury rate.   The chair warmers consider that anyone in business that has hazards and can't repair those hazards immediately shouldn't be in business.  (simply because chair warming isn't hard to reduce hazards, nor is it a productive or prolonged investment system).

Also with the "culture of care" that other overpaid chair warmers are inflicting from several different directions on Fonterra, there is going to be more regulations pouring forth from the cornucopia to "protect food safety and food preparation areas".  The rules in this area are already past moronic (eg, fix cracks in dairy yard) but this ruling is just an excuse for Fonterra, MPI and other sig's to invent more useless rules in order to look like they're doing something productive.  These will all expected to be "cost of doing business" at farm level and will carry no cost recovery mechanism.  All signs are that these conditions will increase, not ease off with drop in payout.

fonterra might offer more financial support and lending but at the end of the day, that's just them acquiring your farmland.

So can anyone recommend some decent non-farming jobs for an ex-cowboy with bad feet and poor writing skills (yes, that IS what has kept me from those careers in the past, as those who read my comments probably understand by now...)

Waymad ... are you willing to put your money where your mouth is on those beef prices ??

Real commitment, here with lots of witnesses?

Well, I've just invested in a half-share of a 400g piece of fillet steak.
 
Will let you know how that pans out.....

Thank God the engine room of the NZ economy is Auckland, hope they can deliver. Time to put up or shut up. 

yep!

The Engine room of NZ Economy is NZ...enough with regional hysterics.

We are facing many contagion risks , this morning the Greek Stock market fell as much as it did in the 1987 world stock market crash .
Some banks in Greece have seen as much as 28% of their value wiped out , which is really serious .
They are toast unless they recover quickly .
Its still early in the day , so there is time to recover before the markets in Euro zone close
Lets hope that this does not spread !

dp

Youse fellas heard of Commodity Financing yet?
Turns out that in recent years growth in most, if not all, commodity imports into China was less about consumer driven consumption than we believed was the case. 
Instead, commodities were bought predominantly to use as collateral for access cheap(er) loans in international markets.
As Chinese interest rates were north of 6% there was a real incentive to circumvent capitol controls and secure US$, Yen or Euro loans at historic low rates.
Guess they got creative with their accounting.
But that's not all.
Seems it was such good business that increasingly the commodities were used multiple times for loans from different lenders.
A bit like having your cake and eating it too ha ha, who said it can't be done.
However, several investigations are currently attempting to determine: 
*where said commodities are stored
*whether they actually exist
*who has right to them
*where's the money
*how the fraudulent loans will be accounted for
Looks like they pushed some boundaries.
Word is lots of the dosh financed high interest loans for speculative investments like real estate.
Anywayze, there's a fbit of a bun fight going down as you might expect.
Milk's a commodity, right?
Check it out, let your fingers do the walking, search CCFD
Time to wise up NZ 
 
 
 
 
 
 

where ?  they get sold on the side from the warehouses and supplied to companies that want it.  Usually with proper paperwork, often with less than idea paperwork to reduce the overheads hence "tipping it into the habour to grab later, saving on warehousing" (yeah did you stocktake it? or just sign for it)  and "this warehouse is empty, shipping must have been confused with another location and gone there, and has probably been set aside since it landed there with wrong paperwork."
  this is a country awash with Aussi Iron Ore... where the locals are bashing rebar out of old concrete for cash.

The most embarassing thing about milk powder...is you actually need proper conditions to store it safely, and it has moderate life span.

So Fonterra appear to be back on the "if you can't beat em just crush em" bandwagon again. 
Mymilk TM. Excess capacity in  Te Wai Pounamu so we will make it easy for farmers to supply Fonterra with no need to share up and we'll drain all those noncooperative upstarts. 
Wouldnt it be good to NOT encourage new milk and try and sell what they have for more. Fonterra is looking more and more like the old NZDC and less and less like the highly successful Tatua.

Don't be surprised if it isn't the opposition that is crushed.  

Delicately put, but very pertinent.

But, but, but ..... Wasn't TAF supposed to do away with redemption risk?
 
It appears no one in Fonterra or amongst their consultants thought through the obvious.

The only people that believed THAT lie were the ones selling it

Christchurch-based mymilk will initially focus on attracting milk in the Canterbury, Otago and Southland regions where competition for milk supply is most intense, but chief executive Richard Allen said the plan is to eventually include the North Island as well.
Suppliers that are not currently supplying Fonterra will be offered one-year contracts, renewable for a maximum of five years without the obligation to purchase Fonterra shares. At any time, mymilk suppliers can apply to join the cooperative, purchase shares and supply Fonterra directly.
http://www.nbr.co.nz/article/fonterra-will-collect-milk-non-shareholder-suppliers-first-time-history-bd-166585
 
is this:
acknowledgement of the supply/production value of shares
route to selling shares to plug opex losses
 
looking up at BH's read bar chart, the dividend looks thin and not soon to double?
as an aside who are these?
https://www.nzx.com/companies/FCG/announcements/258610
http://jcpip.com.au/
and
http://jcpip.com.au/cms-reading/what-we-are-reading.phps

  • John Maynard Keynes, “Essays in Persuasion”. Macmillan Cambridge University Press, 1931
  • Peter Bernstein, “Against the Gods: The remarkable story of risk”. John Wiley and Sons, 1996
  • Nassim Nicholas Taleb, “Fooled by Randomness: The hidden role of chance in life and in the markets”. Penguin Books, 2004
  • William Poundstone,  “F ortune’s Formula:  The untold story of the scientific betting system that beat the casinos and Wall Street”. Hill and Wang,  2005
  • Paul Carroll and Chunka Mui, “Billion Dollar Lessons:  What you can learn from the most inexcusable business failures of the last 25 years”. Penguin Group, 2008
  • M. Belen Sbrancia, “Debt, Inflation, and the Liquidation Effect”.  Department of Economics, University of Maryland, Preliminary Draft, latest update: August 6 2011.
    Sbrancia assesses the extent and importance of the role of inflation in governments reducing their debt burdens. The working paper can be found at: http://www.econweb.umd.edu/~sbrancia/Sbrancia_JMP.pdf 
  • Carmen M. Reinhart and M. Belen Sbrancia, "The Liquidation of Government Debt". National Bureau of Economic Research, Working Paper 16893, March, 2011
    Reinhart and Sbrancia's paper suggests that the liquidation of government debt through financial repression is most successful when accompanied with a "steady dose of inflation". The working paper can be found at: http://www.nber.org/papers/w16893