Fonterra cuts forecast milk price

By Jim Cornall contact

- Last updated on GMT

Fonterra's chief executive believes things will improve later in the year.
Fonterra's chief executive believes things will improve later in the year.

Related tags: Milk price, Powdered milk, Milk

Fonterra Co-operative Group Limited has reduced its forecast Farmgate Milk Price for the 2015/16 season from $2.97 (NZ$4.60) per kgMS to $2.68 (NZ$4.15) per kgMS.

When combined with the earnings per share range of $0.29-0.36, this means a total available for payout of $2.97-$3.04 (NZ$4.60-NZ$4.70) per kgMS and would currently equate to a forecast cash payout of $2.91-$2.94 (NZ$4.50-NZ$4.55) per kgMS to our farmers after retentions.

Chairman John Wilson said difficult global economic conditions 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,”​ Wilson said.

“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.”

Demand could improve prices

Chief Executive Theo Spierings said Fonterra believes that dairy prices will improve later this year.

“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, urbanization and favorable demographics,” ​Spierings said.

“Fonterra has remained focused on reducing costs, increasing efficiencies and shifting more milk into higher value products,”​ he added. 

DairyNZ issues response                                                                 

DairyNZ chief executive Tim Mackle responded to the news by saying, “This will have ongoing effects on farmers’ cashflows, their business equity and their ability to keep managing debt. The reduced milk price announcement today means our industry is facing a reduction in dairy revenues by around $516.6m (NZ$800m). That means $43,000 (NZ$67,000) less in cash revenue for the average farm producing 150,000 kgMS.”

"The issues creating the soft prices are supply related.  Europe is well ahead on production in the last three months. It looks like we could start the 2016/17 season with less than break-even milk prices.

“On the bright side, a lower New Zealand dollar will provide some support to milk payments and should keep fuel prices and on-farm inflation in check. But the break-even milk price for the average New Zealand farmer is still $3.49 (NZ$5.40) per kg/MS so they will be getting $0.97 (NZ$1.50) less than that this season,”​ Mackle added.

Westland projected payout also down

Mackle noted that announcing the news early was important so that farmers could make decisions. 

"Many will have to pick up extra work on their farms. Some will be looking for off-farm income opportunities. They will be looking at all their options and banks will be joining in those conversations,"​ he said.

Fonterra’s announcement follows that of another New Zealand cooperative, Westland Milk Products, who adjusted their projected payout to $2.68-$2.87 (NZ$4.15 - NZ$4.45) per kgMS, down from the predicted $3.16-$3.42 (NZ$4.90 to NZ$5.30).

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