Fonterra concedes that a reduction in the forecast milk price payout this year will be 'very tough' on its farmers

Fonterra concedes that a reduction in the forecast milk price payout this year will be 'very tough' on its farmers

Fonterra has cut its forecast Farmgate Milk Price for the 2015/16 season to just $4.15 per kilogram of milk solids from the previous forecast of $4.60 and concedes that this will be "very tough" for its farmers.

With a dividend of perhaps 35c to 40c on top, this means a potential total payout to farmers of only $4.50-$4.55per kgMS.

Labour's finance spokesperson Grant Robertson said the move would cost farmers "tens of thousands of dollars" and said many "will be under more and more pressure".

While Fonterra had been widely expected to trim its forecast in the wake of recent GlobalDairyTrade auction results, the new price pick is still very much at the low end of market expectations (although ASB economists were picking an even slightly lower price of $4.10). See here for the full dairy payout history.

The dairy giant's earlier price pick of $4.60 had been dependent on a recovery in global dairy prices early this year. But while it is generally expected still that prices will recover as the year goes on, such a recovery is now simply going to come too late to salvage this season.

The co-operative's chairman John Wilson said global economic conditions continue to be challenging and are impacting demand for a range of commodities, including dairy.

“Key factors driving dairy demand are declining international oil prices which have weakened the spending power of countries reliant on oil revenues, economic uncertainty in developing economies and a slow recovery of dairy imports into China. In addition, the Russian ban on European Union dairy imports continues to push more product on to the world market.

“There is still an imbalance between supply and demand which continues to put pressure on global milk prices. Since last September, prices on GlobalDairyTrade for Whole Milk Powder (WMP) have fallen 12% and Skim Milk Powder (SMP) prices are down 8%.

“Although New Zealand farmers have responded to lower global prices by reducing supply, that has yet to happen in other regions, including Europe, where milk volumes have continued to increase.

Fonterra chief executive Theo Spierings said while global demand remained sluggish, Fonterra supported the general view that dairy prices will improve later this calendar year.

“However the time frame for supply and demand rebalancing has moved further out and largely depends on a downward correction in EU supply in response to the lower global prices. These prices are clearly unsustainably low for farmers globally and cannot continue in the longer term.

“It is important to state that despite the current challenges, we have confidence long-term international dairy demand will continue its expansion due to a growing world population, increasing middle classes in Asia, urbanisation and favourable demographics.

“While a unique series of global issues are impacting the forecast Milk Price, the business is performing well, as outlined in our business update in November, and is on track to generate improved dividend returns. Fonterra has remained focused on reducing costs, increasing efficiencies and shifting more milk into higher value products,” Spierings said.

Wilson said: “The reduction in the forecast Farmgate Milk Price will be very tough on our farmers. As we confirm the Co-op’s performance for the first half of the financial year, we will look at the best way to help our farmers’ cash flows, underpinned by the expected improvement in dividend returns and the financial strength of the Co-operative.

“We will continue to keep our farmers updated as the season progresses.”

This is the full statement from Labour's finance spokesperson Grant Robertson on the Fonterra announcement:

Milk payout drop: Govt must take action on economy

National must take urgent action to diversify the economy after Fonterra slashed its forecast milk solids payout in a move that will cost farmers tens of thousands of dollars this year, says Labour’s Finance spokesperson Grant Robertson.

“The sudden drop in forecast milk solids payout from $4.60 to $4.15 is terrible news for farmers and the regions they support.

“Federated Farmers Dairy Chair Andrew Hoggard said the fall could cost farmers over $50,000 on average and that ‘we could be looking at a third season of low prices’.

“With receiverships already happening, many farmers will be under more and more pressure.

“The drop comes a day after Fitch ratings agency revised our near term growth prospects downward because of declining prices for dairy exports and on the same day the Reserve Bank said dairy prices remain a risk.

“The Reserve Bank Governor can’t fix the economy on his own. He’s stuck between the rock of low inflation and falling growth and the hard place of the Auckland housing market.

“Yesterday’s Auckland-focussed announcements on infrastructure spending won’t be well received in regions that are mostly reliant on dairy farmers succeeding.

“New Zealand needs a more diversified economy to help insulate us from major commodity shocks. We need to invest in job-rich industries and support companies to move up the value chain. We can also bring forward projects to stimulate the economy. Despite more than a year of warnings as dairy prices have plummeted there has been no real effort from the Government to do this.

“This year looks like one of the most volatile since 2008. National can’t sit on its hands and do nothing,” says Grant Robertson.

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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63 Comments

What level of debt and therefore losses would a typical dairy farm be incurring right now and how will their bankers be feeling about future prospects?

Average losses around $300k per year, obviously the higher your debt is the faster you burn through equity. It doesn't matter how much you owe, or how much you paid, you can't make a profit farming at this payout. It's hug a dairy farmer day today, obviously they are not the only ones depressed at the moment, but I can only be nice to one person per day.

It's all fun until equity starts to vanish.

payouts in 2000->2005 seemed to be about $4/kg. Were farmers loosing money then or have costs ballooned?

There is a long convoluted answer to that. I won't give it. Yes costs have ballooned, possibly even doubled.

Costs have gone up a lot, and most farms are using more intensive systems now so cutting costs would mean much lower production.

It's not about production it's about profits and for that you need lower costs.

On average about $100,000 loss for a average farm, more for an average farm with irrigation

The average debt across all Dairy is ~$20 /kg
At $4.15 it is well bellow the cost of production,on farm.Let alone living expenses,interest,depreciation and plant replacement.
I know of some farmers with more than $30 debt,
Who would want to be a Rural Banker.

I would suggest the only Rural Bankers that aren't stressed are those in Drystock areas or those that ignored their bosses requests to "sell more money" in recent years.

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Watching rural NZ implode in front of my eyes has been as exciting as watching paint dry, the circus should have stopped in 2008.
Debts pile up and just when you think only an idiot would lend any more, the bank managers are there the next day doing just that, modern farmers became debt junkies.

The sheep industry is in crisis and a lot of NZ hill country is sheep country, options are limited.

The beef industry is approaching it's next crisis as demand drops away and US herds finish rebuilding.

Many dairy farms are debt ridden, flawed, high cost models that never had a long term future, built on capital gain and lots of hope but most of all debt.

There is no easy answer and yet Joyce was back yesterday announcing more money for research, to meet government targets to double Ag production by 2025, just as the wheels fall off, great timing.

This is tragedy for so many hard working Kiwi families, sucked into what looked like a great future but was in reality just another bubble but bigger and more dangerous.

Remember this guy

http://www.nbr.co.nz/article/fonterras-40million-ferrier-revealed-dw-129525

was he worth the money?

Options should involve serious cost cutting by government and local bodies, not holding my breath, watch rural NZ start to suffer as any money goes straight to desperate Aussie banks.

The RB should never have let bubbles in assets occur, major fail, but the politicians loved it.

Meanwhile back in LaLa land we just promised 2.5 billion for a new rail link in AKL.

Profit is the gap between costs and income. If incomes have hit a ceiling then someone needs to do something about costs, before we end up in a tragedy for many hard working farmers and their families.

hence the urgency to get the TPPA signed.... only overseas investors can 'save' us now.

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Or we go back to low cost low debt, intergenerational family farming operations, which is where we should have stayed in the first place.

yes and in fact that is where I think we have to, no will go.

Exactly, but you can't create a business plan that works at <$20k/ha. So..........

True Andrew, but that is the antithesis of what agribusiness was designed to deliver!

The family owned farm system contributed beyond mere economics. It has produced social benefits of great value to New Zealand for over a hundred years

XD

yes more overseas investors to pump up the bubble and keep the dream going.... i have been to the mountain top ..I have seen the promised land.

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I agree, except bubbles are not in the control of the RB but Govn. So for me yes sure Pollies love bubbles on the way up because it boosts gov. coffers and helps get them re-elected. It will go to custard but that is for the next crop of Pollies to "fix"

I think its a sad indictment of us the voter that we are not holding Pollies to account but blindly vote for National as its the "the party to vote for" (same for labour supporters) . So we accept their lies and all we seem to do is look at how we are doing today and if is all OK not worry about tomorrow, that is excessive, unjustified optimism and incompetent.

"this is tragedy for so many hard working Kiwi families, sucked into what looked like a great future but was in reality just another bubble but bigger and more dangerous."

Indeed but much of it can be laid at the doors of these families themselves. They as adults looked at the tax free gains at retirement and the promises of Pollies and the likes of Fonterra and jumped in, so I can but think they let greed get the better of them. Just as an aside my wife has just come back from a 40th school re-union, she was shocked and concerned by what she saw in more than a few as many of the farms owned by ppl in her year seem to be seriously struggling to get by.

As someone said its not a case of employee V employer, that is a huge mistake and a mis-direction. Its a case of employee and employer V the banks who have turned into financial parasites.

It is going to get a lot worse. My view is farm (business) income is going to drop, plus energy costs will rise, that means the only thing left to give is the ability to service excessive debt, ie default/bankruptcies are certain. My view is farms are probably over-priced by a factor of 4 and maybe 6 so just how many farmers will be left standing after that shake out? 1/2? Then the banks cant take that sort of loss, so they will go as well, that means depositors and investors take huge losses and many of those are actually the pension funds we in retirement expect to pay us. My view is I expect 2 of my 3 pensions to fold and maybe the third leaving me with the OAP (will the Govn really be able to pay it?) and if i am lucky the ability to work.

and that is my sunny outlook, my dark clouds outlook starts to get to look a little too much like Mad Max for comfort.

Neither Labour nor National have shown any success, or even willingness to make the hard decisions that could lead to diversification of the economy. Successive Government's records are appalling on this matter as they all pander to big money at the expense of ordinary Kiwis. TPPA will further deepen that hole as it protects multi-national corporations in roads into the country, and further increases our reliance on diary exports.

Yep.....huge failure by successive Governments to look into the future and plan for it.

Estimates are about 200,000ha of dairy land that will never be able to have its debt repaid - about 13% of milking land - what are the chances its bought by foreign buyers, but then that's no different to already being owned by a foreign bank...is it?

13% based on what?

I might have been hallucinating as I am a bit under the weather right now but I swear I saw a clip of John Key on CNBC this morning. His words were something like..I am a dairy farmer and I will still be a dairy farmer tomorrow.....god almighty I thought. Does our John put the cups on every morning before he goes off to run the country? How many cups I wondered. Does he milk 300, 1000 or mebe just 1....theres no end to this guys talent. Is he a twice a dayer....or the new breed of once a dayer? But aside from that why was he having to convince someone on CNBC that milking cows was still a goer... ? How much exactly could the aussie banks retrieve if push came to shove?

he was an owner in a farm but sold that ages ago, maybe his blind trust that he does not know what it investing in owns some, but then how would he know like he said its a blind trust and i do not get told (tranz rail shares anyone)

Oh Belle, He was speaking metaphorically. He's got the cups on us with the vacuum wound up so high, that he is going to collapse our udders.:)

Mine have already collapsed ;-/

Did you mean Bill English?

"if push came to shove" now isnt that an interesting Q, how far down the rabbit hole do you want to go?

Doesn't matter

There are only 10,000 dairy farms in NZ representing (say) 20,000 (at most) active dairy farm owners
Then then add in (say) Filipino 20,000 farm workers

You would have to have grown up in NZ to understand John Key's pronunciation
Many if not most of the Filipinos would have a lot of difficulty following JK
If you discount the Filipinos that doesn't leave too many who are going to care what he says about dairying
He could lie through his teeth and only 20,000 would know he's lying

As for the rest of the population - it prolly goes straight thru to the keeper

THE END OF AN ERA CROWN DAIRY FARMING ANNOUNCEMENT: We are at the end of an era of crown dairy farming introduced from England. The reason for this prediction is Queen Elizabeth is at the end of her reign here and Independence is on the horizon for New Zealand. When you buggars have lived in your own little selfish world of farming slavery for only 4 generations ONLY, to find FULL LAND RETURNS to Maori Tribes must be UNDERSTOOD....this will affect all False reported estimations even above. Mass science chemical poisonous spraying land not only affected, the airways, but water table poisoning water evaporation, waterways poisoning. Destroying native swamps, deforestation of native trees, wildlife extinction, planting toxic weeds spreading its seeds, planting toxic trees, you people you pakeha's will be held accountable. EXCLUDING INDIGENOUS MAORI IN YOUR PLANS....is your downfall. Im preparing you for whats ahead because your own media refused to report FACTS.

I think you are dreaming Rangimarie. But pleased to hear your voice here. Driving through the waikato yesterday there were a few stands of kahikatea here and there. I wondered what it looked like 150 years ago. How much was swamp, how much was forest. Its now pretty farms. Cows some onions and potatoes. We cant live in the past. Its sad. You may as well wish for Africa to be teeming in elephants and antelope. We are a pox on this earth. All of us. However we will burn out pretty quick I reckon.Then earth will do what she always has done. Look georgeous. Til she burns up.

If this was not so serious, it would be hilarious.

Look for the final pay out to have a 3 in front.

Sure is beginning to look that way. The Q is how long will we be seeing a 3 (or even a 4) in front? 1year? 3 years? 5 years? 10years? All I read suggests this is a multi-year event with prices kept down as more and more dairy comes on line and fights for a shrinking market share across the world as consumers lose the ability to pay. So 5 years of poor payouts is too outlandish a thought?

Someone convince me no please.

Based on the amount of farmers going broke already, even another year of prices around $4 will see major issues for many farmers.

dp

If this was not so serious, it would be hilarious.

Look for the final pay out to have a 3 in front.

Exports from EU in some cases are up 48% YoY. Some companies are trying to pay their farmers to reduce production. Ironically, Fonterra are adding debt to the balance sheet to shore up farmers balance sheets through the provision of loans (interest free) for the farmers (but Fonterra, owned by the farmers pays the interest). Completely illogical, and means the good Fonterra farmers are supporting the bad ones through subsidizing the interest costs. Meanwhile Fonterra have another $400 million wiped from the balance sheets through losses from their 'investment' in beingmate.

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In their strategy of putting volume above value, the government, the banks, Fonterra and the industry as a whole have - in effect - been actively working to put farms under water or out of business. There is no other way to look at it.

The financing of this fiasco - negative farm incomes - is breathtaking. In roughly a decade, to late last year, dairy debt trebled to some $34.5bn. Again, late last year, Fonterra was sitting on some $7bn of debt, with less than $1bn of revenue. Today's numbers will be further in the red. And there is no credible strategy to turn this debt into productive revenue. Misallocation of finance on this scale is a national business, banking and government scandal.

If there were any accountability in the sector, there would be senior resignations throughout MPI, Fonterra and the banks. It will, however, be individual farmers that pay the price of this debacle. If they have been farming for capital gain, good luck to them. If they thought they were following any sort of plausible business strategy, they have been taken for a ride.

So true workingman and it is time a book was written on Fonterra, and the tragedy that the dairy industry I grew up with has become - exhausted farmers, depleted land, butter boxes replaced with bags of powder, and no-one to lead from the darkness...

There isn't a dairy company in the world that isn't impacted by the current low prices. The current situation is not a 'Fonterra exclusive'.

True, CO. So why would the government, MPI, Fonterra and the banks want to follow them into the volume ditch?

"So the long term fundamentals look good" and kiwi cockies will come through with flying colours".

Wilson and others often refer to volatility. In actual fact the basic product prices have haven't been volatile at all, they just haven't moved in the direction they thought in any of the last two years. For instance WMP is stuck at around $2200 US and staying there with no reason to shift up or down but it's not what they want or predicted so therefore it's " volatile ".

and from Westland - Man in China

http://www.radionz.co.nz/audio/player/201787334
- plus a shout out for the SFF Belfast meat works.

Um, yes there is. Most of them are laughing all the way to the bank. Think of the multi-nationals dairy companies that manufacture high value consumer products. Their margins are going up up up as the price of base ingredients goes down down down. The only ones that are suffering are the ones that exclusively make low value ingredients, or have no overseas owner that has an interest their own supply chain.

You're right, but these companies aren't in Fonterra's sector. Nor do they have the same strategy in play that we do. And for good reason. The trend to premium products hasn't slowed. It has grown radically and continues to grow. Whereas commodities have been in long term decline. (It isn't as if these facts were only recently discovered.) And where did New Zealand decide to pitch its stall? And even at its low-end functionality, Fonterra's incompetence has been such that Danone - one of its most important relationships - packed its bags and walked. But, of course, having the Chinese market sewn up would paper over the cracks...

Most of them? Which companies are you referring to - corporates or cooperatives? That is short sighted thinking. If you gut your supply of the raw materials you have less material with which to make your product, results in lower sales etc.

http://www.europeanmilkboard.org/special-content/market-responsibility-p... (the video explains the programme)

http://www.europeanmilkboard.org/special-content/news/news-details/artic...

Fonterra can't survive in present form it will need Government intervention.

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And who, FB, would you say has any business capability in the government? The government has been behind this shambles. If it means reloading Fonterra's credit card, this merely compounds the problem. And the taxpayers, now and for a generation to come, are already in hock for environmental remediation - again a result of the volume over value idiocy..

We are barely getting thru their current/existing interventions....

We do not need further Terrace implants in the corner office.

Idiocy at the taxpayers expense;

As a sweetener for the irrigation deals, the Ministry of Environment coughed up $6m to replant lost weed beds and begin other rehabilitation measures. This was matched by $2m from ECan and another $2m from Ngai Tahu, Fonterra and Selwyn District Council.

http://www.stuff.co.nz/the-press/business/68674419/lake-ellesmere-cleanu...

It's a perfect example of what you get when democracy gets cancelled;

http://www.stuff.co.nz/environment/72377723/horrible-conditions-at-troub...

The often unseen and unspoken of, are the servicing industries/businesses to the dairy farming sector. These businesses often are the back bone of employment in rural towns. If dairy payouts remain <$5 (and there appears nothing to say that they won't), then many rural towns will start to suffer unemployment in a way they haven't for many years.

On a positive note - I know of farmers selling their beach pads to reduce debt and survive.

How much farming debt is solely 'farming' and how much of it is 'trinket asset' debt?

Would that not depend on farmer type, corporate or otherwise? Doesn't the bulk of the debt attach to the former?

Correct Stephen. It would still be interesting to know how much of the non corporate debt is for 'trinkets'. Some farmers have 'farm' debt that has in fact not funded farming assets. As I heard on the weekend from some farmers they are selling these non farm assets and discarding a significant, and in some cases all, their farm debt. One said they sold their holiday house and can now survive on $4kg. I suspect they aren't the only ones who are/have taken this step. Those farmers who used equity (and not a lot of cash) to buy their second farm are the ones that will find it extremely difficult.

Coincidence? International Dairy co-op leaders met in January to discuss industry challenges. At around a similar time the USA & EU start talking about lifting sanctions on Russia.

http://www.idfa.org/news-views/headline-news/article/2015/12/02/dairy-fo...

Maybe global trade warfare isnt a very smart idea after all.
Maybe australia will need to talk about brazil about ore and ditto the coal producing countries.
Maybe unfettered capitalism is'nt as profitable as the theory
Perhaps Karl Marx is right and it is mutually assured distruction
Who knows?

Andrewj is correct. The Dairy Industry, MPI, MfE, PCE and numerous banks have been made aware that their obsession with dairy expansion has been misguided. From 2007
http://www.agprodecon.org/node/99 through to 2015 numerous papers have been presented to provide a more "enlightened" perspective which entailed some actual thinking. This one sums up the reasons for the demise being experienced.
" The intensification of the NZ Dairy Industry-Ferrari cows being run on two-stroke fuel on a road to nowhere? NZARES 2014. http://www.nzares.org.nz/ Peter Fraser" The message was ignored despite being clearly explained and demonstrated.
Dairy farmers have been encouraged to "intensify" without understanding the implications. Perhaps because they believed the continual flow of positive predictions or that any increase in production was profitable. They appear to have been easily duped by trusting those whose only purpose was vested interest.
This brings no satisfaction to anyone. But does bring a sense of deep frustration to those who predicted the outcome but were always ignored and sometimes ridiculed. Andrewj has endured his unfair share of such ridicule but in the years I have viewed his comments on Interest.co he has been closest to reality and to understanding the farmer's dilemma.

Oh I dunno. There's something rather appealing about schadenfreude.

It is nonsensical to talk of 'Dairy' as if it is one large undifferentiated sector. It's like talking about the USA or China as if they consititute a single, homogenised country.

Configurations include:

  • single-block, family-owned, low-tech, single product, single supplier
  • Multi-farm, family-owned, low-tech, small product diversity, single supplier
  • Multi-farm, corporate-owned, low-medium tech, moderate product diversity, multiple supplier
  • Multi-farm, corporate-owned, high-tech, moderate-high product diversity, multiple supplier

Clearly, there are a raft of other factors around:

  • debt carried
  • WACC
  • nature of that debt
  • degree of TLA regulation
  • level of exposure to Elfin Safety
  • proximity to waterways and groundwater
  • irrigation
  • weather independence (e.g. winterbarns, barns)
  • soil types
  • altitude
  • GDD for each unit/pasture type
  • it's a very long list....

So common taters' august pronouncements need to be preceded by a lick or two at the salt block (it's in the corner of the paddock, right over there).....before taking any of it too seriously. Including this one.