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.