Further falls in global dairy prices indicate that even a $6.50 farmgate milk price could be in doubt

Further falls in global dairy prices indicate that even a $6.50 farmgate milk price could be in doubt

By David Hargreaves

Embattled dairy co-operative Fonterra seems faced sooner rather than later with having to drop its $7 per kilogram of milk solids price forecast for this season.

Further downward pressure has been exerted by another fall in global dairy prices, which dropped 3.6% overall in the GlobalDairyTrade auction early on Wednesday.

The dropping of the $7 price will be further bad news for farmers who are already dealing with a series of strife-torn announcements from Fonterra, including the slashing of the dividend and trimming of the milk price for the season recently finished and more latterly the putting on hold the search for a permanent CEO on hold and appointing of an interim person in the position. The string of adverse developments have led to widespread discussion about the future of Fonterra.

The $7 milk price appeared optimistic when Fonterra first made it, and economists have been disinclined to believe that this figure would be achievable.

Both Westpac and ASB economists currently have a forecast of $6.50 for the milk price, but both said on Wednesday that after the latest global price falls even their $6.50 forecasts were now subject to "downside risk".

Westpac senior economist Michael Gordon said slowing demand in China, a weaker Chinese yuan and concerns about the impact of growing trade tensions are potentially weighing on prices.

"We recently upgraded our farmgate milk price forecast for this season from $6.40/kg to $6.50/kg, on the basis of a stronger performance for skim milk powder as stockpiles in Europe are run down.

"The latest auction result isn’t out of line with our milk price forecast but does present some downside risk.

"We continue to view Fonterra’s $7.00/kg forecast for this season as too optimistic."

ASB's senior rural economist Nathan Penny said the recent dairy gains from the lower NZ dollar appear like they may be short-lived. 

"Over the past two weeks or so, the NZD had at one stage fallen nearly 3% against the USD.  And this fall was boosting dairy prices in NZD terms.

"However, the dairy auction price fall (down 3.6% overall) overnight has trumped these gains.  On top of that the NZD has actually regained some ground against the USD this week, so that the NZD/USD fall is now around a more modest 1%. 

"Notably, last night’s fall did not coincide with a change in dairy market fundamentals such as changes to the NZ production outlook. 

"Rather it coincided with Fonterra lifting its milk fat auction volumes forecast for the next 12 months – butter volumes were lifted by around 12%.  With this in mind, it was not a surprise to see milk fat prices lead the auction price decline; butter prices fell over 8% for example."

Penny said that "in the absence of fundamental changes to markets" ASB was sticking with its current milk price forecast view. 

"Nonetheless, we cannot ignore price falls indefinitely.  As a result, we stick with $6.50/kg 2018/19 forecast, but continue to note downside risks to that number."

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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Those of us interested will recall what happened last time Fonterra forecast $7 at the start of the season. The next two seasons just about broke us.

Don't worry Wilco, the Fonterra board has come up with a new winning strategy. They are going to invest truckloads of cash building processing plants in China.

https://www.stuff.co.nz/business/farming/106481932/fonterra-weighs-up-wh...

They have this fantastic lady Christina Zhu leading the team and she says:

thorough due diligence had been carried out on Beingmate with internal and external parties involved, but market conditions changed and evolved.

"I've got a great job, a great team, we're delivering great results. Beingmate's disappointing but it's a small part of what we do. Serving on the board takes a lot of energy but my biggest job is to lead a greater China business for Fonterra."

So no worries, Beingmate was just pocket change. Maybe they will ramp up the spend next time!

If she thinks Beingmates problems were caused by a change in the market, she is deluded. It was a subprime brand from day 1, any Chinese consumer could have told them that.

This is good news! Hopefully will bring dairy prices at the super market back to reality. Couldn't care less about what "dry milk powder" goes for in the 3rd world.

Thanks for the link Aj. Though I doubt many of the keyboard warriors in this stream would read it or even understand that dairy globally is challenging - it's not just a Fonterra issue.
Wisconsin lost 430 dairy farms last year and in the past five years has lost 1,770 dairy farms, Cropp said.
It's a wonder that the farm quoted can support 4 people - in NZ that would be done by 1-2 people. 150 cows is a one man job here.

Even after Orr opened his mouth with Satan like precision and made the dollar fall? Maybe Orr will take aim at the TWI next.

Oh Fonterra, you're such a one-trick-pony .. when it comes to innovation you say 'neigh' - send Boxer to the glue factory~!!

one trick pony,are you suggesting they start dealing in other commodities?imagine the reaction if that went south . If you sell milk products , and the price is down, your in trouble. Everyone rolls out the value added , extra processing spins , but that only works for niche markets, The bulk of the world markets want raw product in bulk. The value added is probably best met by smaller producers.

Farmers need to get some balls and vote out the rot at the top.

Farmers , like their Co-op leaders, need to be aware that like Houses, Like Oil, Like Venezuela, Like Turkey, Like all commodities, there are ups and downs.;;and droughts and floods and yes...Peaks and troughs.

Debt is not just tax deductible interest wise, it is crippling sometimes commodity wise, when there is glut, and also when people have little income, prices may fall. It pays to keep your powder dry and save for a rainy Day...like us poor people have to do.

Nothing is a one way street anymore, inflation, Land and its uses, used to be something Land Bankers and others milking the system, could rely on...

Banks lend on your circumstances.

Banks are the issue, when they stop issuing debt, but want their pound of flesh, and cannot milk the inflated systems for all that its WORTH....customers dry up, just like Cows, Paddocks and other commodities, being dampened down else where.

But when Customers, cannot or will not pay off everyone Else's debt, it becomes a millstone around and around the Financial System of all those who thought they had money to burn ad infinitude ally..

Our China al-lies, cups runneth over, their wishes are not what they used to be.......Awklanders and yes Farmers, have had a reversal...the money is not there to burn....get over it...one and all.

Money flows until it stops for reasons....then on to pastures....new.

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If one looks at the interest.co tab for record of dairy payouts, you will see that usually dairy has at most 2 up years for payout before a reduction. So volatility in payout has been with us for decades - but it has been bigger swings between highs and lows since the formation of Fonterra. But this is not exclusive to the NZ dairy industry - worldwide there are fluctuations in payouts to farmers.
Farmers are more aware now of what their operational costs/kgms are and more are also taking notice of marginal costs.

What would be interesting to know is how many farmers are playing the dairy derivatives market and how many are making money on it and how many have lost money and if lost money, how big are those losses. Fonterra operated a guaranteed milk price - GMP - but then suddenly, without any real consultation with shareholders, pulled the plug on it and then lo and behold NZX came out with dairy derivatives. I would like to see GMP brought back - it helped many through the drop from $8.40kg to $4.40 then on to $3.90/kg. I understand OCD offered a form of GMP to their suppliers for this season.

Out of interest, as a late comer to dairy derivatives etc. Does anyone know if Fonterra had a 'backer' for themselves (and who it was) when they put out those GMPs' would have been very foolish if they didn't.

Isn't the default backer the shareholders, via the final milk price? Or in the case of OCD - the suppliers? ;-)

According to Fonterra, the default backer was the buyer of the product. They were supposedly locked into a contract that resulted in $XX milkprice. Of course that negatated the idea of a cooperative by removing product from the common pool, something Fonterra have been quick to point to when it suited and even quicker to ditch when it didn't.
Fonterra also never answered the question of wether it was the suppliers or shareholders who backed it, in theory it couldn't be suppliers due to the milkprice manual, but........

They were locked in to a contracted price, however Fonterra had to get the xxxnumber of kilograms from suppliers under GMP to meet the contract, otherwise they would have been taking milk out of the general pool, would they not? From memory most GMP offers were fully subscribed but some weren't. It contributed as much as 20c/kg extra for all suppliers, one year, according to an accounts meeting I went to.
I don't see offering suppliers a choice as negating the idea of a co-op - after all what is the difference between that and any other incentives the co-op pays. If suppliers didn't meet their contracted supply, under the terms of their contract they had to pay Fonterra the value difference. If payout went higher than the contract - as it did when the GMP price was $7kgms and the final milk price $8.40 the supplier was actually worse off for taking it. It was a risk management thing. Suppliers had certainty of GMP portion of production covered at a guaranteed price and could budget accordingly.
The sudden ditching of it, IMO, was more to do with the Chairman being up for re-election, and many shareholders, especially in the north island, not understanding/supportive of GMP. It was the only 'incentive' payment available to 100% of suppliers, none of the others are, so in some ways showed more 'co-op' ethos than anything else they did, or currently do, regards milk price incentives.

With that GMP milk removed from the general pool or those buyer contracts removed from the pool to cover the GMP contracts, either way you look at it that ups the risk however slightly for the remaining production. Is it just coincidence that at that point the final payout fluctuated more than at any other time?
I would have said the reasons for dropping it were simpler, Those organising the contracts didn't think much of the job those setting the milkprice were doing. As evidenced by today's dropping of the milkprice which everyone except Fonterra knew was coming.