Fonterra cuts farmgate milk price forecast to $3.85, offers farmers interest free loans

Fonterra cuts farmgate milk price forecast to $3.85, offers farmers interest free loans

Fonterra has cut its farmgate milk price forecast for the current season by $1.40 to $3.85 per kilogram of milksolids, but is offering farmers what it's terming "interest free loans" to help them through the tough times.

On top of the payout Fonterra gave an earnings per share range of 40 cents to 50 cents, meaning the total forecast payout available to farmers for the 2015/16 season is now $4.25 to $4.35.

Fonterra will provide all share-backed farmers the chance to apply for "Fonterra Support" amounting to an additional 50 cents per shared up milk solids for production for the season. It says this payment will be interest free for two years, and is to be paid back when the farmgate milk price or advance rate goes above $6 per KG MS. CEO Theo Spierings wouldn't say when Fonterra expects the $6 figure to be reached.

However, the co-operative estimates Fonterra Support could amount to $430 million for the June to December period, which will be paid for through Fonterra's transformation project.

Production volumes are being reduced by 2%.

Fonterra said the advance rate for farmers, which was previously $3.66, will be dropped to match 70% of the forecast full-year payout which takes it to $2.70.

Fonterra blamed "continued significant imbalance" in the global dairy market between weak demand and too much supply for the reduced milk price forecast.

"Lower dairy prices are clearly totally unsustainable and we're seeing farmers increasingly globally grappling with these prices," Fonterra chairman John Wilson said.

"We expect dairy prices will start moving back upwards before too long," Wilson added.

He said Fonterra had "very strong communications" with its farmers' banks, and was seeing "very strong support" from banks for farmers.

$3.3 billion less than average in farmers' pockets

Westpac senior economist Michael Gordon said compared to an average milk price of around $5.80/kg, today's announcement implies $3.3 billion less revenue than normal for Fonterra's farmer suppliers.

"Fonterra is forecasting improved earnings of 40c to 50c per share for the added-value side of the business. However, Fonterra's stated dividend policy is to pay out 65-75% of earnings over time. Taking the midpoints of these ranges would give a dividend of 32c a share, not a significant improvement on last season's forecast of 20c to 30c per share," said Gordon.

Duncan Coull, Fonterra Shareholders’ Council chairman, said most farmers are facing a payout lower than their cost of production, some for the second consecutive year.

"With this latest forecast, the support package will be critical to many and is a clear benefit of being a Fonterra shareholder," said Coull.

“Whilst farmers will appreciate the support package announced, it is absolutely critical that in seasons like this where the milk price is down that our Co-op’s strengths come to the fore and Farmers receive the full benefits of Fonterra’s integrated co-operative model, which pays profits back to Farmer Shareholders, for a higher total payout," added Coull.

“Board, management and the Shareholders’ Council have all stated that Fonterra’s performance needs to improve and it’s important that the strategy, including the velocity programme, delivers tangible benefits for shareholders especially in times of low milk price.” 

Average farm income down $150k; Nine of 10 farmers seen needing extra debt

Meanwhile, Dairy NZ pointed out rural businesses, not just dairy farmers, will feel the impact of Fonterra's lower forecast payout. Dairy NZ CEO Tim Mackle estimated the lower forecast means a reduction of $150,000 for the average dairy farm income for this season.

“The harsh reality of this announcement is that Fonterra farmers won’t actually receive $4.25 to $4.35 because of the way the payment system works. It’s likely to be more like $3.65. The effect on the level of payments over a season will keep farmers’ cash income constrained for at least the next 18 months and it will take some farmers many years to recover from these low milk prices," said Mackle.

“At a national level the $1.40 reduction means another $2.5 billion dropping out of local economies. This obviously impacts on farmers and their own already stretched business cashflows. It makes it even harder for them to manage their way through. Milk price is now half what it was in 2013/14. We calculate around nine out of 10 farmers will need to take on extra debt to keep going through some major operating losses. For the average farmer you are looking at covering a business loss of $260,000 to $280,000 this season but for many it will be a lot more than that,” said Mackle.

 “There are a lot of other rural servicing businesses that will be affected too. More than half a farmer’s business income is spent on farm working expenses. Drops like this have a cascading effect through rural economies."

Mackle said Dairy NZ's analysis shows the average farmer now needs a milk price of $5.40 to breakeven.

The milk price was last as low as $3.85 10 years ago in 2005-06. See our dairy industry payout history page here.

Here's Fonterra's statement

Fonterra Co-operative Group Limited has today announced that the forecast total payout available to farmers in the 2015/16 season will be $4.25-$4.35, comprising: - Forecast Farmgate Milk Price $3.85 per kilogram of milksolids (kgMS) - Forecast earnings per share range of 40 - 50 cents per share.

Fonterra has also announced Fonterra Co-operative Support of an additional 50 cents per shared-up kilogram of milksolids to support farmers this season.

Revised 2015/16 Farmgate Milk Price Forecast

Chairman John Wilson said the Farmgate Milk Price forecast has been reduced from $5.25 kgMS to $3.85 per kgMS due to the continued significant imbalance in the global dairy market between weak demand and surplus supply.

“This imbalance and the challenge of lower prices continuing for longer than anticipated is a global issue, which dairy farmers around the world are increasingly grappling with.

“Current prices are unsustainably low and we are seeing them beginning to impact production levels globally. We have confidence that prices will recover over the course of the season. However, it will be a tough season for our farmers. “The range of possible scenarios is contributing to the uncertainty we are seeing today.

“We know the global dairy market will improve. The hard thing to call at the moment is exactly when and how quickly,” said Mr Wilson.

Forecast available for Payout

The Co-operative has announced $4.25 - $4.35 forecast total available for payout for 2015/16, comprising the revised forecast Farmgate Milk Price of $3.85 per kgMS and an earnings per share range of 40 – 50 cents. Fonterra has a dividend policy of paying out 65 – 75 per cent of adjusted Net Profit after Tax over a period of time.

Chief Executive Theo Spierings said the key influences of forecast earnings are expected to be:

- the positive impact of the lower Farmgate Milk Price on consumer margins globally for New Zealand-sourced products - the contribution from transformation within the business - movements in New Zealand product mix returns.

“As part of this work and given the current pressures facing our farmers, we have reviewed our capital expenditure for the next two years. As a result we are now targeting a spend of $$500 million - $600 million less for 2016 financial year compared to FY15.

“We will continue to update our farmers and the market on business performance and the delivery of expected gains from the transformation of the business as the year progresses,” said Mr Spierings.

Fonterra Co-op Support Mr Wilson said Fonterra is uniquely placed to help its farmers because of the Co-operative’s underlying strength and is providing Fonterra Co-operative Support for farmers in the form of a loan to help farmers deal with the challenging conditions.

“This support is all about standing together as a Co-operative and using our collective strength to help our farmers get through these tough times,” said Mr Wilson.

The Co-operative will provide all Fonterra share-backed farmers the opportunity to apply for Fonterra Co-operative Support amounting to an additional 50 cents per shared-up milk solids for production for the season. This payment, interest free for two years, will be paid back when the Farmgate Milk Price or Advance Rate goes above $6.00 per kgMS.

A first payment will be made in October for June to December and will continue until May. Payments will total 50 cents per shared-up milk solids over the season but will be phased from October as transformation savings are delivered. Fonterra Co-operative Support for the first half of the season (June to December) is estimated to be up to $430 million, depending on take-up rates, and will be funded by one-off savings generated by changes the business is making, such as improving working capital.

The Board and management intend to continue this through the season and in December will review all relevant conditions including the global dairy market and progress on transformation, to ensure that it remains in the best interests of the Co-operative and its farmers to continue Fonterra Co-operative Support through the season.

Mr Spierings said Fonterra continues to believe strongly in dairy and this farmer support is an investment in the future of the Co-op. A Fonterra Co-operative Support schedule will be made available as part of the application process.

Milk volume forecast 2015/16

Fonterra has reduced its New Zealand milk volume forecast for the 2015/16 season to 1,589 million kgMS, 2 per cent lower than the previous season. Chairman John Wilson said the revision reflected the likely impact of farmers using more traditional practices to manage their farm businesses within the limits of a low payout forecast.

“We are already seeing our farmers reducing stocking rates and reducing supplementary feeding to lower on-farm costs. In New Zealand we have the advantage of a largely pasture-based system which will allow farmers to lower costs. Nevertheless, it will be a very difficult season for farmers if current prices continue,” said Mr Wilson. “We expect to continue seeing our farmers make these sorts of on-farm decisions – particularly in light of today’s announcements,” said Mr Wilson.

Today's announcement comes after prices fell another 9.3% on the GlobalDairyTrade auction earlier this week, reaching the lowest ever on the GDT and settling at levels not seen since the 2002-03 period. It was the 10th consecutive fall in prices at the auction and the key whole milk powder price slumped a further 10.3% and is now down a staggering 31.7% across the last three auctions.

Fonterra's opening farm gate milk price forecast for the current 2015/16 dairy season, made in late May,  was $5.25 per kilogram of milk solids. The advance rate for farmers was $3.66. In May Fonterra predicted a 2014/15 price of $4.40, plus a dividend of 20-30 cents per share, amounting to a forecast cash payout of $4.60 - $4.70 for a fully shared-up farmer. In 2013/14 the total payout was $8.50.

Fonterra said today its 2014/15 forecast was on track to meet previous guidance, with further detail due at the end of September.


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If your shares arent already guarrenteed to a bank?

Advance rate will be?

Would be interesting to see how long banks can hold on to the record low price without foreclosures.

God bless indebted farmers. God bless NZ.

I predicted this at the beginning of the year. When the kiwi farmers start going to the wall, and many will, surprise surprise, guess who's going to be there to pick up the pieces and save the day... Drum roll please... Dun dun dah! You guessed it... Twenty years from now we're going to be overtly managed from Beijing and this current NZ government will be despised.

Still hugely optimistic - another couple of dairy auctions should tell a tale. Something closer to 3 dollars would have been more realistic.

Absolutely right.

A major agricultural bank operating in NZ were saying about 10 days ago that the pay out should be $3.30/kg (at that stage specifically) and then the last auction dropped another 10%. All Fonterra is doing here is trying to keep people as calm as possible.

Even this reduced level of payout requires an average price of $2,300 for WMP over the season. Given the current price of $1,500 that suggests that the price at the end of the season needs to be ~$3,000. I presume that is what they mean by "We have confidence that prices will recover over the course of the season".

What do they think is going to change over the course of the next few months - more demand from China/Russia or less supply from US/EU....?

Jack - well at least finally the milk futures market is pointing up and the futures market has been pretty accurate with the auctions lately. However its only a slow rise and only getting close to that $2,300 level before season's-end. But I guess if correct, and the bottom's only an auction or so from here, then lets hope the recovery is a little stronger than the futures market is suggesting

ASB still saying $4.50 for this season. In a chat with Danny Watson on Newstalk ZB today, Nathan Penny reiterated he believes $4.50 for this season.
He also stated that on the farming show 2 days ago.

Pleased I'm not an ASB customer with the bank stating those sorts of views.

yeah you have to wonder where that guy gets his banking wisdom from

Have a look at Fonterra's balance sheet and increased debt levels in just the last 6 months and think what this initiative is going to do to that.

They are approaching debt levels where they will soon exhaust further borrowing options for what is an extremely risky exercise by in effect offering loans to farmers. What if the payout never gets back to $ 6 ?

WMP prices may not return in the foreseeable future to previous levels with the supply situation outlook showing little sign of reducing significantly.

Agreed. Banks will have the first mortgage so this is basically unsecured lending to an industry under extreme stress,

Plus given it is interest free, every farmer will take the max. Even if by some miracle they don't necessarily need the money they can stick it in the Bank and earn interest on it.

they will be limited to criteria, it's not a government department

But, they are Too Big To Fail

I suspect that the dairy industry's bankers were either supporting or driving the initiative:

Hoggard, who was at a top-level meeting with bankers and Fonterra in Auckland this morning, says farmers must be in contact with their bankers and advisers.

That doesn't mean the move is smart - perhaps one more of desperation.

And nothing for the sharemilkers

I believe sharemilkers are being made the sacrificial lamb.

Equity partners. Borrowed to get into 'farm ownership-white gold' now will be flat out borrowing to curb the overdraft. Many lawyers, accountants, ex farmers, farm managers, vets, the mind boggles.

Yes and don't bet on this being a one season phenomenon either. Just what provincial NZ needs, the gutting or at least partial reduction of local services.

Here's the Next Crisis "Nobody Saw Coming"

"Nobody saw coming". Excellent. Coming to a town near you soon - cuts in services, libraries shutting down and the new skateboard rinks been shelved but the local council still needs to employ a few more penpushers. Easy to do when you're spending someone else's money or in most cases borrowing it.

Difficult task knowing which services to cut. Can't keep all the people happy all of the time.

Wait a couple of years and once Auckland Council sinks under its weight of debt, we'll have a blueprint for the rest of the country.

What would be the outcome of sharemilkers getting smart and reducing production to where their marginal cost equalled their marginal revenue?

Sorry if that was a rhetorical question but maybe every single dairy farm in the country needs to try that approach for a change.

It was a serious question, and today's effort by Fonterra, finance and probably the government was about preventing it being considered.

However they left out of their consideration sharemilkers.

Do the maths and get back to me.
:) Remember I exited the industry at the end of may.... most farm costs are fixed.

How much do you think a sharemilker can operate with NZ overheads on half of $3.85 = $1.93
$1 of that alone is minimum labour. 50c will be electricity.

Did you work on average costs?

If not did you know your marginal costs of production?

because my business model was slightly different and one of the main reasons for farming as to actually analyse the farm business and be able to build a franchise-able model around low-cost sustainability, I had to work from my own cost figures, not industry averages... plus a lot of "industry figures" are actually lies/"adjusted" by people who don't want to look bad.

But like most farmers I never had annual reports/accounting information to work from, as our accounting details were always 8 - 12 months behind. So we could do a budget forecast but we didn't have the labour spare to be monitoring it week-to-week. There is simply too much labour to be done, and not enough margin to cover non-productive employment. But we could work to efficicency and productivity, and working from past years results those are the numbers I had. And I was one of the most efficient producers - as sharemilkers/leasee you have to be, as you're effectively do the whole farming operation on only 50% of the listed payout !

Thanks for that response Cowboy.

It deserves time and attention but I don't have either adequate and available for the next 24 hours, maybe a little longer.

Apologies till Sunday.


Basically we already have an idea of kgMS production +/- 5%. In my case that was 55,000 kgMS.
We knew the land size as a constant 59 ha.

We knew the labour contracts for staff. 40k for me including a NAIT provision in my contract), 20k for relief milker.
Same for other fixed costs. Power is flexible but the milk out time is pretty consistent 7-8 minutes a row. the wash-up time is pretty much 20 minutes plant, 20 minutes extra for everything else. With same wash procedures the pumping and effluent is consistent enough to get a kWh per kgMS harvested. or more useful a monthly electricity vs monthly production. Because the land doesn't change much, and the herd is at the optimal per hectare +/- few head, the power requirement doesn't jump much.

And if it ifts one month it drops later, and vice versa. As long as management is consistent it's pretty predctable - the only real trouble to predict is equipment breakdowns, staff drama, and Fonterra/MBIE.

Colin farm owners have ultimate control of the farm management in sharemilking situations. They are unlikely to agree to a deliberate reduction in milk production unless they also will gain from it. As 50/50 sharemilkers equity is tied up in their stock they are not going to want to reduce cow numbers too much or they will potentially lose too much equity. Our 50/50 sharemilkers ROI over the last 4 years was 19-26%, ours as farm owners, was 4-8%. We have philosophical reasons why we employ 50/50 sharemilkers and we share the dividend 50/50.

In consultation with our sharemilkers we took GMP at $5.25. Sharemilker was talking to a mate who said he had a joint meeting with banker and accountant and they came to the joint conclusion that taking GMP at $5.25 wasn't worth it. That farmer thought they were doing the right thing by getting 'professional' advice. They would have been better off talking to their Fonterra Area Manager. Sharemilkers who have been in the game for a while and haven't taken on a lot of recent debt shouldn't be too badly off (in relative terms). It is the recently indebted ones that will be really struggling.

Friday, sharemilker went in to FarmSource to get some milking gloves. Gloves were discounted 40% so they bought a whole years supply.

And nothing to cut production - something that would push milk price up and dividend down.

I guess they are relying on el nino to do that. Will the crops go in, the feed bought in if it goes dry? Or will that not stack up at these figures and cows be dried off early as in the days before pk?

Given that even at $6 or $7 payouts the last 15-20% of NZ's milk production was produced at at a loss, I don't think a 2% reduction from El Niño is going to cut it.

A big equity partnership near us had to divorce a year ago. This of course followed the tail end of the $8 season. I heard it never made a profit. It didnt look like a cot case. If they couldnt make it in good times...Yes the mind just boggles. Currently theres well over 30 big machines turning forestry to dairy on the southern end of Tokoroa. Thousands of acres. The thought of it is really depressing. Everyone in the district is saying when is enough enough?

Who owns that land being converted?

So let me see. Our volume driven approach to supply is a major cause of the slump in price along with a lack of buyers. Sounds a bit like ECON101 or is this too simplistic. When you've got 14 employees at your HO earning more than $1m per annum, I'm sure it's much more complex than that.

sadly, no.

may be some thinking has moved on.
see the billions ANZ raised this week, and some say CBA/ASB expected to raise A$3 to A$6 bn.

usually if a lending proposition presents, banks will crowd out all others

Thinking has not moved on where it matters to NZ agriculture:

Also this comment from Hoggard from that meeting:

"First is that the medium- to long-term outlook for our dairy exports into Asia is very positive. The second thing is that the banks realise this, and work through their lending to farmers, will be in the best position to capitalise on this future growth"

No doubt, this is the message that is also coming out of Corporate HQ (sorry meant Co-operative HQ) but can anyone tell me how this will be achieved when increasing US production and the removal of milk quotas in the EU will see yet more supply coming on over the next few years?

ROI for some of our European friends may be more attractive than we think when we include and compare land values.

Also, 532 jobs saving $60million per annum is an indication that we have an organisation that is somewhat removed from what's been going on at the farm gate in the last 12-18 months.

I'm not sure this 'borrow and hope' strategy is going to do it. The rest of the world is in turmoil, on all fronts it seems, and if the dairy decline is going to deepen further we will find ourselves really up the creek.

To my way of thinking, the 50c interest free loan further distorts an already distorted market. It exposes more of our citizens to the economic scythe, via bailouts, haircuts, defaults or whatever than may well be casualties now, if market force prevail.

If there is more news to tell then Fonterra should tell it and at least let us make a judgement based on facts and not illusions.

I wonder if Fonterra have been brave enough to work through the losses that would result from a $3 payout this year and next? I'll bet all numbers have been run on a base case rapid price recovery basis.

What if 30% of the loans are unrecoverable? 50%?

This is just what you would expect in a zero/low interest rate situation - collapsing prices.We are seeing it right across the commodity sector; oil, metals, grains as well as manufactured product and services. Good luck expecting wages to rise with those sorts of headwinds.
There is clearly excess production and the normal market response would be the failure of a section of the producers but that is not to be permitted. Fonterra's two year interest free loan will only add to the problem - particularly when similar strategies are taking place throughout the dairy world. The banks are being warned not to sell up distressed farmers, subsidies remain or are strengthened, fertilizer, fuel and labour inputs decline in price and cheap debt is used to maintain some semblance of profitable sustainability. This is DEFLATION squared and, perversely, largely a consequence of a seriously warped attempt at creating INFLATION.
Meanwhile assets - stocks, real estate and even these marginal farms - are producing lower and lower rates of return as their prices bubble upwards.
What could possibly go wrong?

The question about the Fonterra interest free loan (which is good coop behaviour btw) is whether the milk price will recover to a minimum sustainable level, what is that level, and can NZ dairy farming survive at that level.

From my work and background, based on last years rules, $5 per kgMS was the Raw Milk sustainable cost. To get below that the farm land had to be provided for free/interest free, which is not by definition, sustainable. This includes 10c/kgMS development budget.

The question is can Fonterra overall, now it's skewered by dry investors, re-develop its payment model to to see Raw Milk purchased at that price.
Also land farmers might find they have to take a smaller ratio due to influence of higher operational costs (minimum labour, higher ACC,insurance, fuel etc)

Remember Fonterra buys Raw Milk (currently priced by WMP) but extracts many items of added value, and produces many valuable ingredients. Thus gives them the big salaries (WMP, cheese, butter are the bulk low value items). It might be time that a larger portion of those is paid back to meet that Guaranteed Minimum $5 price, as a matter of course.

Cheers Cowboy, I'm sure that Fonterra are supporting their farmers as best they can, don't hear of any of their fat cat executives taking a haircut though. The guts of the problem with oversupply remain and I guess that means some producers will have to exit the business. We all have our fingers and toes crossed that our guys will be OK and that it will be some overseas dairies that fall over first.

Can farmers just dry the cows? No production = less losses?

that would mean firing most of the staff. animals still eat.

what's the problem. you can make anyone redundant anytime in Nz. And you can eat the cow.

You can't just make anyone redundant anytime in NZ, and I'm going broke isn't a good enough reason. Go talk to MBIE or a employment specialist lawyer to find out.

You actually have to be able to show change in business structure which removes the position from the business, and you can't do it preemptively "just to save the business".

And it takes a long time to just eat one cow - and three years to grow another one. (1 year gestation).
Considering that removing the cows below the best feed rate will just lift per unit cost of production, and won't reduce fixed overheads, what good do you think it will do?

Same rates.
Same insurance.
Same rent.
Same vehicle maintenance and emergency costs.
Same interest costs.
Same electric, phone, and internet fees.
Same (zero) fertiliser budget.
Same accountancy fees.
Same repairs and upgrades costs to meet inspection criteria.
Same petrol and diesil bill.
Same contractors bill for feed.
Same miscellanous costs for magnesium and calf pellets.
Same vet bills.
Same mating costs.

Only real flexibility is staff wages. And with MBIE getting hard on contracts and hours logged there aren't going to many farmers upgrading their foyers and getting curved screen display units....

And if you're growing grass then your working on margin, so what is the feed cost per unit of production?

From DOL website:
- the introduction of new technology
- rationalisations of staff to increase business efficiency
- restructuring business operations, including a change in the organisation's roles or location
- closure of business
- outsourcing, and
- sale of the employer's business.

looks like you can find an easy way for redundancy. Also you could have put some nasty clauses in the contract that makes the dismissal even easier (if the employee shared pics on facebook while working on the farm, stuff like that...). Standard contracts in the shark infested Auckland corporate waters.

sharing the pictures won't do it (you'd need warnings and proper procedures first)
nasty clauses will get you fined in employment court under unfair practice.
dismissing staff (for being on facebook/taking pictures) during an economic downturnis likely to get you serious fines and damages under rules for constructive dismissal.

technology introduced must lead directly to the position redundancy - I can't upgrade my ute and make a milker redundant - I'd have to automate part or all of their contribution.

rationalisation of staff for business efficiency is carefully monitored to make sure it's not constructive dismissal, and so has to actually involve business model changes and workflow changes, and be carefully documented, especially during downturns.

restructuring, as above, times to actual business changes, not just because you're cutting costs. eg to drop a milker you must show that you won't be lifting cow numbers in the future. Just as we can't terminate of have fixed year long contracts "just because that's our financial year". We _could_ hire seasonal staff based on milking period, or calving period, but that has to be in their contract when it is negotiated (so they can bit up the price for the seasonal work)

closure of business is not "to stop us going broke" but when the doors are closed and everyone laid off.

Outsourcing is a combination of model and location. When the position is part of a whole department or process that for business reasons is sent elsewhere - eg if the farmer sent the cows to another farm and there was no extra milkers/feeders required there. If the new location/outsourcer needed expansion then the first offer must be made for staff to transfer.

Sale of business is effectively closure.

It is deliberately not easy, and I know this well having been through more than few on both sides. And on the sidelines when a friend was dismissed by the company restructuring to get him out. Also been on the sidelines for many cases where it wasn't done well and it cost the business a fortune in the employment courts.

"Current prices are unsustainably low...." No, current costs are unsustainably high (not limited to the dairy industry either). You get that when everyone demands more though. Put that in your Economics 101 pipe and smoke it. Economists won't admit that their beloved economic theory can't control that.


Note the potential fair value cash losses of $ 957 million in the six months to Jan 2015 page 35.

I presume this is the result of FX cover and a sharply falling NZ $.

You do start to wonder if these guys are just out of their league. That's a billion dollars down the Swanee in round numbers. Who is accountable ? What were they being paid for ?

JB, the detail is in Note 9 of the interim report:

This shows the net unrealised loss on derivative transactions was $878mm. Remember this was in Jan 2015 when the FX rate was 0.7264, so by now it will be much worse. In 2014 the equivalent number was an unrealised loss of $63mm

Below is from their 2014 Accounts: Financial Risk Management:

"In respect of transaction hedging, the Group’s policy is to hedge 100% of the net recognised foreign currency trade receivables and foreign currency trade payables, and up to 100% of forecast cash receipts from sales for a period of up to 18 months. The level of hedging undertaken is influenced by current exchange rates and the time until the expected cash flows occur, within the limits approved by the Board. The Group seeks to designate items in a hedge relationship where it is practical to do so; therefore some derivative instruments entered into as economic hedges may not be in a designated hedge relationship for accounting purposes."

So they have already sold forward all of their expected USD revenues for the next 18 months. Apart from completely ignoring the high correlation between Milk Prices and the NZD, this suggests that they have sold forward actual revenues for the next 2-3 years, given the USD price has dropped so much.

If this wasn't so serious it would be comical

Thanks for that, this has been bugging me for sometime, only because you could see it coming as it has every time the dollar they are exposed as years behind the ball.


Where are Key, Joyce and co now spouting their "double the output of milk" b.s?
Wonder what's happened to Lochinver Station, just what the country needs, one of the largest holdings converted to dairy/dairy support?
What happened to Chinese president's "we can take all the milk you can produce" now?
I wonder how Lewis Road Creamery and their farms are doing?

Pengxin are currently re-structuring and re-arranging the ownership which will result in a change of shareholding. As such the OIO is requiring them to offer the Crafar farms plus Lochinver Station up for sale in a "claytons" sale. It's up for sale on trademe now. Until that charade is out of the way not much else will be happening

Thanks for that info. I will now be busy all weekend putting in my offer. LOL

BTW does anybody have any idea what the success fee would be if it sold on Trademe.

I am sure all dairy farmers round the country will be thrilled to see even more land into the production of milk no-one seems to want.
I believe all the predictions that were made around the time they purchased the Crafar farms will come to pass, they will not be bothered one iota what Fonterra are paying out

As before they will have subscribed to the GMP and recieve $5.25 for 75% of it.

Well some out there in the financial world like the announcement - shares up 24c to $4.90. ;-)

Don't expect price rises any time soon.

Ireland has put over 11,000t of butter into private storage since May

Presently, world consumption for dairy products is increasing at 2% per annum and probably slowing due to economic factors, while production is increasing at 4% per annum and all major producing blocs have signalled their intent to increase production.

France to call for intervention price increase at emergency Council meeting

Belgian farmers dump manure and milk in latest protest

Landcorp, say it's not our fault it's Fonterra's, it must be some kind of comedy Friday.

Dairy model 'broken': Landcorp boss

bit bit bit, he was a box of birds six weeks ago....

If they made the lease conditions public, we would all be wondering who the hell would sign a contract like that.

A govt bureaucrat expsnding his horizons Aj. Thats who ;-)

Full marks Henry, a very professional execution of a deserving FW.

What exposure does Rabo bank have to dairy?

And didn't Rabo parent remove the guarantee recently?

Who invests with Rabo?

Weren't most of there depositors "on call"?

What about a "run on funds"?

The RBNZ must be watching this announcement closely

Rabo are pretty careful lenders, all existing depositors are covered by the parent in Holland. I think the big risk takers are the Aussie big 4 and a few smaller banks.
When I go to Rabo meetings most of the farmers there are very well established, the few that were a worry have been moved on, in fact I have friends who were with Rabo but got moved on. They had a few rouge managers, they left for other banks in 08/09 when they replaced NZ management with someone from home.
The farm risks are nothing compared to the risk in housing, a drop in the bucket.

You may want to check your facts Andrewj. There was an announcement around 6 months ago that the Dutch parent had withdrawn the guarantee. S&P have downgraded them a couple of times since.

Housing is a separate issue, and I don't disagree with your argument. My concern is concentration of counterparties, and exposure to one segment

My observation, is that they are very quiet these days

I got a letter from Rabo informing me that all existing deposits were guaranteed by the parent all new deposits were not.

Rabo bank is HUGE worldwide

"We expect dairy prices will start moving back upwards before too long," Wilson added.

Based on what, crossed fingers and toes? How or why is demand going to pick up, and do they expect the current and likely continued supply in the market to some how drop off?

Surely everyone by now expects prices to sit low for the next 1-2 years - who are they trying to convince

Yes purely assumption based not facts

I think what i'd be worried about if i was a dairy farmer is that the Chinese may stay out of the market for long enough that they end up buying all the better corporate farms around the world, leaving the smaller farmers out in the cold, suffering permanent lower prices.

That is the sort of thing we were warning of about back in 2010.

China strategy for most industry is to buy the raw material and add the value themselves, WMP, Timber, iron ore, coking coal. Fonterra has not helped develop a value add business in NZ, in fact it tried to stop them.

In 2012 the Supreme Court turned down Fonterra’s appeal against a ruling it must supply raw milk to rivals – in this case businesses controlled by DIF – even if they didn’t process it themselves.

The Supreme Court was unanimous in upholding the lower court decisions.

“To require a new entrant to possess or borrow the capital necessary to establish its own facility would establish a significant barrier to entry into the market,” Judge Andrew Tipping found.

The court awarded $15,000 in costs, plus disbursements, to respondents Grate Kiwi Cheese and Kaimai Cheese.

Still, the Kaimai and Te Mata businesses ultimately failed and Taylor said the cost of buying WMP was a major factor.

Having to pay millions is a significant barrier to entering the dairy farming industry. judges are so out of touch.

I think Fonterra bought Kaimai in the finish.

No Kaimai sold it's assets to a company who was going to produce UHT milk. Fonterra owns Kapiti Cheese. ;--)

CO, I had a mate who milked Goats for Kapiti, had a good operation, a hardworking couple. The problem was when they sold out to Fonterra, Fonterra demanded the become shareholders ( great way to buy a company), they couldn't justify the cost on a 200 acre farm so they sold up and the farm is a dairy run off now ( I think). He is probably better off as he has time for a life, although sometimes a bit tense.

My Parents didn't like the Fonterra emphasis for Bulk product so sold shares and joint Kapiti.
Only to have Fonterra go an d buy Kapiti a year later and force them to rebuy their shares :(

Ah....Kaimai/Kapiti oops

Ugly, ugly China trade print- July exports fall 8.9% y/y (est -0.3%), imports down 8.6%. Jan-July exports -0.9%, imports -14.6% (yuan terms)

Winston Peters:

"It is high time Fonterra's board comes down from Mt Olympus to act in the best interests of its farmer-owners and not some economic theory,"

"Two cows were herded through the aisles of a supermarket as part of a protest over how much dairy farmers are paid for the milk they produce."

Gareth , the UK farmers don't get good prices , but the UK public pays much less for milk at the supermarket than we do here in NZ

For example 2 litres of housebrand milk in TESCO supermarket is 44 Pence Per Litre of milk .

That's equal to about 85 NZ Cents a litre and we pay way more than that here .

Fonterra's most profitable ( but small ) market is right here ..... that's us .

nz dairy farmers are getting about 34 cents a liter at the moment, and have higher overheads and no subsidies.

My UK farmer friend is receiving 29p/litre from his co-op but is expecting this to go down. He also has his own cheese business. He sells his cheese to supermarkets for three pounds per 250gm block. What I found interesting is that they also seem to have some control over the markup the supermarket can put on the cheese. They are not overly large producers of cheese but must make a good product as they can't keep up with demand.