DairyNZ cuts breakeven milk price as higher than expected production lowers costs for farmers

DairyNZ cuts breakeven milk price as higher than expected production lowers costs for farmers
Image sourced from Dave Young off Flickr

DairyNZ has revised its breakeven milk price for the average New Zealand dairy farmer down 15 cents to $5.25 per kg/MS.

"Due to favourable weather conditions production has been higher than initially forecast leading to lower costs per kgMS," the organisation says. 

Yet even at $5.25, the breakeven price is well above Fonterra's seemingly optimistic forecast farmgate milk price of $4.15 per kg/MS for the current season.

ASB economists cut their milk price forecast by 20 cents to $3.90, following prices falling for the fourth consecutive time at the fortnightly GlobalDairyTrade auction on February 17. The GDT Index fell by 2.8%, while the key wholemilk powder price fell a further 3.7%

Westpac economists trimmed their milk price forecast earlier this month by 20 cents to $4.00, while ANZ economists slashed theirs by 30 cents to $3.95. 

As for the 2016/17 season, Westpac has dropped its forecast to just $4.60; ANZ, $5.00; and Westpac is at $6.00.

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I read a slightly concerning article on Fonterra yesterday in the NZ Herald on how the debt has ballooned over the last few years to $7.5bn and is now 80% geared which is ,generally,very high for a company.
I know little about Fonterra but are they able to survive a sustained period of milk prices at the current prices?

Just look up Fitch and the others...

Importantly for creditors, milk payments to Fonterra's New Zealand supplier base were effectively subordinated to payments to other creditors....

You question is strategic/industry policy level.

I saw they have A- rating and it tended to infer that might be under threat. Their cost of borrowing which up to now has probably decreased due to falling interest rates but if they get downgraded it will start to increase. Looking back they seem to have been way too optimistic and it tends to be over optimism at board level that often results in company underperformance or failure.

Yes not too many NZ commercial operations have investment ratings - it costs (Landcorp have as well we understand).

Any downgrade would probably be part of the industry funk, part the scrambled egg situation we have.
We have a set of industry policies that has created certain commercial standards that Fonterra has to meet. These industry standards have produced sometimes odd business actions and engagements within NZ. However the policy and follow-on business logic it has yielded appears to have issues in dealing with the actions and reactions of international business and international export trade.





With science they are Ok

This analysis is not science, and best as a survey of historical results.
There are many farming types, farming styles & locations and financial structures that turning the historical survey logic into a forecast is pretty brave.

These are cash expenses - accounting expenses would included depreciation - a considerable figure on a dairy farm with tractors / plant / equipment / houses / dairy sheds etc.

Interesting to read Buffett's latest and previous shareholder letters on whether depreciation is a real cost or not.

This is simply kicking the can down the road - depreciation is a real cost that has to be provided for in any economic analysis of a dairy farm.

Too right JB, I have often wondered about this.

With Fonterra having such high debt levels, will payouts to farmers remain low even after milk price recovery, as they try to service this massive debt. A bit like SFF.

Interesting Pita Alexander articles Henry Tull - back then I had concerns too as to the global milk supply & rising China debt to GDP, and the inability of the last financial crisis to re-balance markets.

I liked this article at the time:

What I'm currently interested in is the housing debt in NZ, could that possibly be more worrying than the farming debt? & the actual health of the banks? I see Heartland bank didn't have much equity/reserves in their last shared financial statements! but yet they are posting a publicised profit,

Our other big banks link to Australia

Be nice if there could be an easy solution/magic wand to fix all this stuff and we can all be positive forever !!
Maybe the extinction of financial greed as a learned human trait ??

Thanks AbbeyD for the link - what will our canary be? Falling prices in rural towns or perhaps Coromandel baches collapsing in a big way. I hope our bank officers have been a bit cleverer than those that gave a 23year old Queenslander over $8m to invest in a one trick country town.

Tuff call guven they have the same masters.

Seems a bit of confusion here. The low milk price is in fact very good for Fonterra as it lowers the price it pays for its raw product which it then processes into a more value added product to make its shareholders richer. It's the supplier that suffers under a low milk price.

I am not following you there red cows? Are Fonterra currently processing their cheap raw product into more value added products ?

Interesting Viewpoint;

Good article that one. Most of my point is answered in the first government problem in the article. Fonterra are trying to serve more than one master. They can't have a high milkprice and dividend/ retention at the same time without pissing lots of people off. Hence they will fail to please any master in the coming year.
There was also a certain amount of sarcasm in the value added comment. They have talked the talk on that one for many years but failed dismally.

I follow & agree red-cows :) - Certainly an interesting article
Hard to be an outside the square thinker

Absolute totally worst case disaster scenario the NZ Govt could always bail out Fonterra? ha-ha

Example Sort of like the subprime mortgage crisis in 2008/9 when US Govt bailed out Freddie-Mac/Fannie-May etc etc...

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