Keith Woodford looks at Fonterra's latest payment forecast, separating what is 'hope' from what is 'prediction', and showing how it affects farm gate cash flows

Keith Woodford looks at Fonterra's latest payment forecast, separating what is 'hope' from what is 'prediction', and showing how it affects farm gate cash flows

By Keith Woodford*

As occurs each year, the media have focused on Fonterra’s opening forecast for the coming year, predicted this year to be $4.25, as if it has significant meaning.

To put that in perspective, here are Fonterra’s opening forecasts and actual payments for the last five years.

Year Opening Forecast ($) Actual Payment ($) Variation ($)
2011/12 6.75 6.08  - 0.67
2012/13 5.50 5.84 + 0.34
2013/14 7.00 8.40 + 1.40
2014/15 7.00 4.40  - 2.60
2015/16 5.25 3.90
( not yet final)
 - 1.35

The overall tendency has been for Fonterra to be over-optimistic by $0.58 c per year. However, the average error in the prediction is $1.27c, ranging from minus $2.60 to plus $1.40.   In three of the five years, Fonterra has been out by more than $1.30. 

The accuracy of Fonterra’s forecasts has been getting worse, with an average error of $1.78 for the last three years compared to 50c in the first two years of the comparison.

So the overall conclusion has to be that Fonterra has minimal skill in predicting payout at the start of the season.  And as volatility has increased, their predictive skill has got even worse.

Despite this lack of predictive skill, the forecast is of some use in that it influences the advance payments that Fonterra plans to pay in the first few months of the year. These numbers are not publicly announced in Fonterra’s press releases, but are available to Fonterra’s farmers by logging on (with password) to the Fonterra website.

For this coming year, Fonterra plans to pay $3.01 in July for June milk, $3.01 in August for July milk, and $3.21 in September for August milk. Then in October they will pay $3.00 for September milk, in November they will pay $3.30 for October milk, and in December they will pay $3.30 for November milk.

There will also be ‘top-ups’ in some months, linked to when the advance rate moves up, and bringing previous payments up to that level. But it is not quite as simple as it may seem, because off-season premiums of 51c per kg milksolids are built into the monthly amounts mentioned above through to the September payment. And these premiums start again for January milk paid February. These off-season payments do not have top-ups.

Also of relevance, is that Fonterra pays ‘retro’ payments in July to October for the previous year. Last year these ‘retros’ only totalled 13c per kg milksolids because Fonterra had miscued by predicting $7 early on, but ended up paying 4.40.  So there was very little left to payout. This year, retros will be 50c.

If this all sounds very complex and confusing, then don’t despair. It is confusing, but it is the reality of being a Fonterra dairy farmer. Estimating cash flows is something that even experienced farmers find challenging.

To try and simplify things, I have provided a table showing the expected cash payments for the next 12 months for a typical seasonal milk producer, and comparing that to the 12 months just gone.  

12 months for a typical seasonal milk producer, and comparing that to the 12 months just gone.  

 Cumulative payments ($) per kg annual milksolids production with seasonal calving 1 Aug.


2015/16 0.00 0.08 0.25 0.70 1.15 1.59 2.00 2.41 2.75 3.08 3.36 3.52
2016/17 0.05 0.25 0.61 1.06 1.59 2.03 2.46 2.88 3.24 3.59 3.87 4.09
Difference 0.05 0.17 0.36 0.36 0.44 0.44 0.46 0.49 0.49 0.51 0.51 0.57

For both years, these cash payouts are significantly lower than the ‘headline’ rate, largely because of the vagaries of retro payments. 

The positive message is that cash payments will be considerably better in the coming months than for the same months last year.  For example, by the end of September there will have been an extra 36c received per kg milksolids compared to September 2015. 

For an average farmer producing 150,000 kg milksolids, this will be an additional $54,000, which will reduce the winter deficit accordingly. But of course for most farmers it will still be a winter deficit.  

Individual farmers will also vary from these figures depending on their fat to protein ratio, and the overall milksolids percentage.  These differences can add or subtract more than 30c per kg milksolids from the cash payout. Calving date also has an effect on cashflow. 

For those farmers who are shared up (but excluding sharemilkers and Fonterra MyMilk suppliers), there are also expected payments of 10c in each of June (this calendar year) and October, compared last year to only 15c, paid in October 2015. And then another dividend, of unknown amount, will be due next April. (This year it was 20c.)

Synalit and Open Country suppliers will receive returns broadly in line with Fonterra (minus dividends), as these companies pay what they need to pay to remain competitive. However, their monthly cash flow schedules may look somewhat different. In contrast, Tatua will again beat to its own value-add drum, and over the full year should come in at no less than $6 per kg milksolids.

Placing any reliance on the Fonterra figures beyond September could be considered brave.  If we look at the last three years in order, by late September Fonterra had lifted its estimated opening price by $1.30 in 2013/14, decreased it by $1.70 in 2014/15, and decreased it by $0.65 in 2015/16.

As the season progresses, Fonterra gets more accurate. This is to be expected, given that increasing quantities have actually been sold. But even in December, Fonterra can be out by 70c, with this last season being the worst, with a December prediction of $4.60 compared to the latest estimate of $3.90.

So the big message currently has to be to treat all Fonterra forecasts with great caution. It is highly likely that prices will jump around until at least December, and may jump around well after that.

I am on record as saying that I hope to see a good uplift in price in early 2017, but I have been explicit that it is a hope rather than a prediction. In the last few weeks, as I watch carefully what is happening in the markets, in particular the way European production is holding up and with surpluses building, I am increasingly concerned that my hopes and the reality are not going to coincide.

According to legend, it was either Mark Twain or Niels Bohr who supposedly first said, ‘forecasting is always dangerous, especially when it involves the future’.

Accordingly, Fonterra needs to be explicit, and farmers need to recognise, that based on its track record, these latest Fonterra estimates could easily be wrong by somewhere between $1 and $2 per kg of milksolids.

Keith Woodford is Professor of Agri-Food Systems (Honorary) at Lincoln University and a Senior Fellow (Honorary) of the NZ Contemporary China Research Centre. His archived writings are at

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Absolutely, great post.
With a pool the only "real" price is 15 months away is our thinking, not unlike crop.
Advance payments are discretionary to the payer.
The pool price is subordinated to other creditors and debt obligations - as the rating agencies always state.
Here is a man talking about the Mill
(use to go floundering as a kid)

Issues also arise with other forecast ed prices:
Bank lender payout figures for loan approval (sales & marketing v slipped passed the credit committee and unlucky for the enthusiastic 10%)
Bank economist public/free commentary
Agri fax (quoted by syndication promoters & compared to a retail bank deposit)
- none of which have any folding (mark to mark) -ve consequences on the authors it seems.

tuff love/good luck punter:

If they can't meet the estimated payout, why don't they borrow to make up the shortfall. Interest rates are so low at the moment, and they could issue more shares for mum and dad investors

Well there is the interest free loan offer already out there. Not sure when against the wall farmers who took that up will be in a position to pay back...

Cheap money is keeping a lot of us in a job doing the wrong things.

The current low payout and lower payouts should have been factored in to the optimistic growth plans of Fonterra, hyped up by the banks. What Fonterra has actually achieved is a diminishing return on milk price for its original dairy shareholders who formed the company. By advocating dairy conversions and believing they needed to get bigger rather than add value, they have shot themselves and their shareholders in the foot.

So now the original dairy farming families are having to get bigger to compete with all those sheep farmers who didn't really like dairy but were encouraged by Fonterra and the Banks to convert. Largely unsustainable, the pain is now here to stay

One of those foot shots you refer ?

When eminently achievable becomes eminently forgettable, init bruv..

But Fonterra is very efficient I was told the other day. Because you can buy whole milk powder from the GDT for about $3.30 per kg, add water, and sell to Fonterra for $3.90 per kg.

There may be some confusion here.
The milk powder is indeed selling currently for about $NZ3.30 per kg
But the $3.90 is per kg of fat plus protein which is called 'milksolids'.
However, the total solids in milk powder includes lactose and minerals which are not included in the quoted 'milksolids'.
So the kg of milk powder contains only about 0.55 kg of milksolids (fat plus protein). Therefore 1kg of milksolids (fat plus protein) has a gross value of $3.3 divided by 0.55, or about $5.90. The cost of making the powder (operating plus capital servicing of debt plus equity) is about $1.80.
So that brings us to a net price per kg milksolids (to the farmer) of about $4.10.
of course this is based on the current price of powder, which always fluctuates considerably over a period of a year
Sorry if this sounds complicated and confusing. I don't make the rules, and I did not invent the confusing term 'milksolids' to refer to 'fat plus protein'; I just play the game by the crazy rules that others have put in place!

It's called the day of reckoning I'm afraid - farmers will have to work within the cashflow set out here. Unfortunately, oversupportive banks and Fonterra advances deferred changes needed to do it. Had to laugh at Fed Farmers comments on 10% facing "undue" pressure from banks. They should probably have said "overdue", because at least that many farms have been ignoring the issue.

"The German government has promised an emergency package of at least €100m for the country’s dairy farmers who have been buffeted by the collapse in milk prices.
Christian Schmidt, Germany’s agriculture minister, said at a crisis summit in Berlin that the aid would include loans and tax relief."

State aid allegedly forbidden in Europe and also I presume in quite a few trade treaties. But then I supposes what about the tax dollars spent on cleaning up NZ rivers?

Germany is Europe's biggest milk producer and Germany alone produces about 50% more milk than does NZ. By my calculations, this 100 million euros support is about NZ 6.5c per kg milksolids.
Depending on how it is allocated, I would expect this to be trade treaty compliant.
I would expect that it will be allocated on welfare criteria and not coupled to production (which would raise questions about trade treaty compliance).
Way back in the 1980s when many NZ farmers were 'restructured out', there were a range of welfare packages implemented in NZ. Also, many NZ farmers had their loans 'restructured' to their benefit. Now it is Germany's turn (and some other EU countries) to go through painful restructuring. Despite the handouts, it is very painful.

Thanks Keith,
any comment on what I said about NZ tax dollars cleaning up rivers? rachel Stewart commented on this in today's Herald as well as saying "Irrigated dairy farming made water, a public asset, available to increase private wealth,..It was equivalent to a subsidy for dairy farmers and "the biggest transfer of public wealth into private hands".

Too complex an issue for me to attempt to deal with in a comment. Except to say:
1) Irrigation is not the only source of river pollution by a long way
2) Ask anyone in Ashburton what they think of irrigation and they will say that it has made the town what it is today.
3) Yes, dealing with nitrates in water is a big issue.

The poor Kiwi farmer is getting a raw deal for his raw milk., forget about worrying about fair trade for African coffee and cocoa growers, our situation is worse, right here at home.

We know it takes 12 litres of milk to obtain 1 kg of milk solid

This implies that at $3,30 per kg for milk solids , the price the farmer gets is 27,5 cents per litre for milk.

Quite how that equates to as much as $2,00 per litre for consumers in Auckland eludes me .

Its little wonder Fonterra is making record profits .

Quite simply , this market dominant monopolistic pricing by the dominant player is not a fair trade practice , and someone should do something about it .

This is what happens when you have a processing duopoly ( Fonterra and Goodman Fielder) and, more importantly, a supermarket duopoly (Foodstuffs and Progressive).

Corporate Hubris is funny thing , it eventually turns around and bites you .

The farmer / processor relationship is symbiotic , and the farmer is the one being milked to death by the processors

The processors flash air-conditioned or heated head offices , mega-salaries , and spending like drunken sailors is a far cry from being cold and wet at 4.30 am in gumboots and cow-dung milking cows ( and worrying about servicing your debt )

Eventually , those being bled to death ( even slowly) either die or turn on the parasites , who clip 2/3 rds of the ticket for little effort.

The day of reckoning will come

And in other news day will follow night...