Fonterra says global dairy prices have not increased as expected; current season milk price forecast dropped to $4.40 from $4.50

Fonterra says global dairy prices have not increased as expected; current season milk price forecast dropped to $4.40 from $4.50

By David Hargreaves

Dairy giant Fonterra's announced an opening milk price forecast for the new season at the low end of market estimates - $5.25, and unleashed an unpleasant surprise by dropping the current season price yet again to $4.40 from $4.50.

Market estimates for the new season price had ranged from as little as $5 to a more commonly expected $5.60-$5.70. The further drop in the current season price had not been widely expected.

The advance rate to farmers for the new season will be $3.66.

Fonterra's farmers, through the Fonterra Shareholders' Council, expressed a desire to put the current season behind them and move on to the next. "The number remains a disappointing one," shareholders' council chairman Ian Brown said.

In terms of the current season, along with Fonterra's previously announced forecast dividend range of 20-30 cents per share, the change amounts to a forecast cash payout of $4.60 - $4.70 that would be paid to a fully shared-up farmer. Last year the total payout was $8.50.

Labour's finance spokesperson Grant Robertson said the "dramatic" milk price forecasts made for a "$13 billion two-year economic black hole".

“The big black hole in the Government’s budget was a plan to diversify the economy so New Zealand is not so reliant on commodity traders," he said.

“...New Zealand needs a modern, diverse economy that creates well-paying jobs across all industries. This Government’s neglect is creating financial risks to New Zealand.”

The Kiwi dollar rose slightly after the announcement - up about a quarter of a cent to US72.7c - which Westpac senior economist Michael Gordon said suggested that "the market was braced for the possibility of something even weaker".

Westpac's retaining a forecast for the milk price to end the season at $5,70/kg, although "the risks lie to the downside".

'Distinctly below average'

"The 2015/16 season is shaping up to be a distinctly below-average one, following a very weak 2014/15 season. Dairy farmers will need to budget cautiously over the next year regardless of where the final milk price ends up," Gordon said.

Fonterra chairman John Wilson said the revised forecast for the current season reflected the reality that global commodity prices had not increased as expected.

“World markets are over-supplied with dairy commodities after farmers globally increased production in response to the very good prices paid 12-18 months ago. This supply imbalance has heightened due to continuing good growing conditions in most dairy producing regions.

“This is a tough season and we will continue to keep our farmers informed as the season draws to a close given the current volatility.”

Wilson said the further reduction in forecast price for the current season would mean a further revision to the Advance Rate Schedule of monthly payments to farmers.

In terms of the forecast price of $5.25 for the coming season, Wilson said it was based on Fonterra’s best view of long-term global dairy supply and demand.

'Expecting recovery'

“We can expect prices to recover going forward, and to see a rebalancing of supply and demand over the season. However it is more difficult this early in the season to determine exactly when this recovery will lead to a sustained price improvement,”  Wilson said

Fonterra chief executive Theo Spierings said the long-term fundamentals of global dairy demand were strong.

“Our forecast for the new season takes into account a range of factors including global milk production forecasts, the economic outlook of major dairy importers, current inventory levels and geopolitical events.

“Given the season we are coming out of, we are absolutely focused on improving farmer returns and driving the co-operative’s performance.”

The shareholders' council's Brown said farmers would view next season's forecast as "as a positive given the situation we have experienced this past season".

“They will also see the announcement as a signal from their board that the market should start to move in a positive direction in the near future, which is welcome news.

“However, all Farmers are by now very well-versed in the realities of volatility in our industry and this needs to be front of mind for them as they work through their budgets."

Expecting 'timely' communication

Brown said that while acknowledging this volatility, farmers would be expecting Fonterra to communicate any significant price fluctuations that occur throughout the coming season "in a transparent and timely manner”.

In the recent past Fonterra's opening forecast for the season has not proven to be a particularly close guide as to the final price. Much can happen, good and bad, during the season with global prices - and much of this cannot be forecast.

In fact in the past two years Fonterra opened with a $7 forecast. In 2013 the forecast ultimately led on to a much higher final price of $8.40 for the 2013-14 season, while for the current season the surprises have all been on the downside, with a final price of $4.40 expected.

Global dairy prices dropped again last week, with prices down 2.2%, the fifth consecutive fall and taking prices to their lowest level since mid-2009 - though there was some sign prices were stabilising.

RBNZ warnings

The Reserve Bank has warned that financial stress in the dairy sector "could rise markedly" if prices remain at low levels in the 2015-16 season. The RBNZ estimated in its six-monthly Financial Stability Report released earlier in the month that despite many farms being in a position to manage down working expenses, around one-quarter of dairy farms are believed to have negative cash flow for the 2014-15 season.

"The sector’s vulnerability to reduced incomes is increased by elevated indebtedness, despite moderate growth in borrowing since 2009."

The central bank said that approximately 30% of the dairy debt was concentrated among the most indebted 10% of farms. "Indebted farms are particularly vulnerable to a period of reduced cash flow."

Fonterra had only recently dropped its forecast milk price for farmers in the current season to $4.50 per kilogram of milk solids from a previous pick of $4.70. Including dividends.

Based on final payout estimates, this suggests a drop in earnings this year of about $6 billion for Fonterra farmers alone and about $7 billion for the dairy farming sector.

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?

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35 Comments

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Once again we find out about it on the media sites before we get told about it as shareholders...........

That is the same as any public company. There are legal rules about leaking information ahead of a market (NZX) announcement. Fonterra shareholders can't expect special treatment.

But but but It's a cooperative David..... Isn't it? John and Theo say so every fifth word even.
Sorry shouldn't be so sarcastic.

Fonterra shareholders can't expect special treatment.

Of course they can.

Which is not to say they'll get it, although history and precedent does seem to be on their side.

its the NZZX
The Fonterra Shareholders’ Market (FSM) is a private market on which only Fonterra Farmer Shareholders, Fonterra and a specially appointed market maker are allowed to trade Fonterra Shares. The FSM forms part of Trading Among Farmers (TAF).

not the same any any public company.

any way just listen to the farming show if you want early oil. (not just fish).

You could explain that in a bit more detail

It seems that FSF is listed on the NZX
https://www.nzx.com/markets/NZSX/securities/FSF

While Fonterra have securities listed on the NZX they agree to NZX rules

And they are listed on the ASX - similar rules
https://au.finance.yahoo.com/q?s=FSF.AX&ql=1

now you are talking FSF, we were speaking of FCG.

FSF is a unit (an Economic Rights, a something) tied to?/ that mirrors the FCG dividend.

as they say:
Outside investors who are not allowed to hold shares in Fonterra can invest in Units in a fund known as the Fonterra Shareholders’ Fund (FSF). The FSF gives investors access to the Economic Rights that they would have received if they were allowed to own a Fonterra Share. The FSF Units are listed on the NZX Main Board.

The Fund name could equally have been the Fonterra Co op Supplier Share Dividend Unit, or Value Add Blue Sky Economic Rights

shows both NZX and ASX will list and clear lots of things, not just shares.

in theory, some had proposed that the value add side of the business could/would produce enduring margins with happy customers far removed from the / a commodity price and dividends would rain/rein.

as doug123 points out by the words exporter and commodities theory has some work to do. Our opinion is that even the value add products are transacted in the style of commodity markets (thou the Ozz supermarkets seem beyond that and well into the Game of Thrones stage), or referenced within a band basis a commodity price.

the shame is that GDT is the last margin/swing/plug volume market segment - the wippy bit that now drives the price. think of this way, whats better with exports/commodity, long term supply and price agreements (say the way most electricity and gas is exchanged) or spot price and a "customer relationship".

hint, relationships are a trick to get right.
perhaps the new money in is not thinking spot once set.

Growers getting squeezed - capitalism at work - the history of the humble banana is instructive;

http://www.theguardian.com/sustainable-business/banana-pricing-unsustain...

http://smallfarmersbigchange.coop/2011/06/07/the-true-cost-of-bananas/

Excellent articles Kate. We are next in line and half way there.

Due to their complex and some would say ridiculous payment system this will mean for this winter there may be no retrospective payments and in fact due to the capacity adjustment some may have even been already over paid. Lucky for us we didn't have a drought this year so we are on the right side of that ledger.

Hooray!

We're all gonna be RICH!

No comment on Ralph Norris leaving?

Yes, timing is everything.

14
up

Isn't it funny that we have the Chinese rushing here to build dairy factories and buy farms, yet the largest exporter in the world of dairy commodities cant even deliver a dairy sustaining price to it's share holders.
Personally I think its time we did a bit of head hunting of the top jobs of this incompetent white elephant.
The whole board of Fonterra need a good shake up. Remember even when the price was high this white elephant could not provide farmers with the true value of their product. Having to change the constitution to allow it to keep trading.
Time the Farmers took back control of Fonterra and get rid of the corrupt shiny arses, and no golden handshakes to boot.

Damn right.
For Capitalism to work the people need to educate and organize.
There needs to be more clarity and accountability at the top.

And farmers continue to pay the directors and managers the big bucks. Go figure.

At least one bloke was trying to get his money's worth http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11456238

A prominent economist has come out this morning and said the RB needs to drop the OCR. That the economy in general has not seen the worst of the downturn in such things as retail and service industries yet as the worst is to happen this year. In other words dairy farmers will want to spend even less this year than last year. Less tax and GST for Inland Revenue and for the government to spend. Batten down the hatches everyone. I thought our economy was on fire. Who is telling the truth?

URL?

Got to wonder just how long the OCR will stay this high. " Batten down the hatches everyone" indeed 50basis points down by December? 100? 0? +25?

I agree the OCR has to drop......and would have preferred the RBNZ to have done this at the last round at the latest.......in typical beige wearing fashion they action will occur to late causing unnecessary pain........Farmers always get a two handed, 2 finger salute, once from cooperatives and the 2nd one from the bureaucracies!!

For some reason the RBNZ consistently gets its timing wrong......deliberate or unintentional !!

Many of us in this little community predicated as much months ago and were dubious about claims of a "rockstar" economy. New Zealand has become far too closely intertwined with the fortunes of China, which is now suffering a reprise of the late 1980s and early 1990s austerity, where the elites have overstepped the mark in seeking a retrenchment of the Chinese economy to what they regard as a more stable footing.

"Put together, China is pursuing the most contractionary mix of economic policies in the G20, relative to the status quo ante. Collateral damage is already visible in the sliding global prices of iron ore, copper, nickel, lead and zinc over recent months, as well as thermal coal, oil, corn and even sugar."
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/114506...

"Electricity use has turned negative. Rail freight has been falling at near double-digit rates. What began as a deliberate move by Beijing to choke off a credit bubble has taken on a life of its own, evolving into a primordial balance-sheet purge"
http://www.telegraph.co.uk/finance/economics/11625098/HSBC-fears-world-r...

"Recent news agency reports notwithstanding, the campaign to squeeze inflation out of the economy and concentrate efforts on exports has not changed materially.

Foreign investors "still must contend with the austerity program and tight credit," Mr. Frisbie says."
http://www.joc.com/tiananmen-austerity-plan-dampen-business_19900603.html

11
up

i cant see a drop in the OCR that even though it would help the regions, whilst this government lets the steam train that is auckland house prices run rabid. if they closed the door tomorrow to foreign buyers and cut back on immigration you could drop by 100

lend me your ear part 1: look at all that milk.....

http://www.farmingshow.co.nz/on-demand/audio/john-wilson-the-fonterra-ch...

lend me your ear part 2: Yeahhhhh.... rrrrrrrrr.......its been a weird year hasn't it, you would have thought.......

http://www.farmingshow.co.nz/on-demand/audio/john-key-the-pm-285/

The farming show describes the payment to the Saudis as a fiscally responsible bribe. There is no denial from the PM. What is in the other half of these free trade deals the govt is setting up, that they are not telling us about?

Typical Labour response, high level mumbo jumbo.. How would they handle it in details please?

Labour's election promises would have been handy in fixing the housing crisis -stopping foreign buyers, limiting immigation, CGT, building 100,000 affordable KiwiBuild houses between 2015 and 2025.

This is not my choice of supply and demand measures but it is more than National is doing and would have had a greater chance of preventing the recent double digit housing price growth figures which is stopping the RB from lowering interest rates.

maybe if they had done this five years ago we would not be in such a mess

as of 1 July the Land Transfer Office will be sharing data with IRD. That makes it pretty easy for the IRD to track who is buying/selling what and when.

Why did Ralph Norris resign from Fonterra ? Sinking ship and all that, perhaps ?

All those who followed the heard mentality and converted to dairy might be feeling a bit sheepish right now considering the market has gone to the dogs.

This Fonterra forecast is designed to keep farmers hopeful. They can't come out and say $4.20 because there would be stronger voices to have the directors heads.

Are you still in California, Andrewj? I imagine the drought is having a dramatic effect on farming there and with summer upon them, its only to become worse for farmers.

What do ya reckon about this interview with a dairy farm consultant on RadioNZ?
http://www.radionz.co.nz/national/programmes/ninetonoon/audio/201756343/...

Andrew is there any discussion of land value taxes and the Wright Act Irrigation Districts in California?

http://www.politicaleconomy.org/gaffney.htm (about halfway down)

Would new municipality districts providing irrigation or other productivity improving services funded by LVT work in NZ?

Will be interesting to see what support there is for the Guaranteed Milk Price option that closes on 19 June. Will give an indication of where farmers see payout going.