By David Hargreaves
Westpac economists have reacted to the sixth consecutive fall in prices at the GlobalDairyTrade auction by lowering their forecast of the price that Fonterra will be able to pay farmers for milk in the new season just under way.
And they also raise the possibility that financing conditions may get even tougher for farmers facing lean pickings this year.
Last week Fonterra announced its official forecast for the new season at a price of $5.25 per kilogram of milk solids.
However, economists generally saw this as a conservative estimate, with the belief that slumping world prices would recover somewhat. A popular pick for the season-ending price in the 2015-16 season has been around $5.70.
But the latest fall in prices at the GDT auction came as a surprise.
AgriHQ dairy analyst Susan Kilsby said that ahead of the auction the NZX Dairy Futures market had anticipated milk powder prices would rise - "however, it appears buyers did not share that positive sentiment.”
ASB chief economist Nick Tuffley and rural economist Nathan Penny are saying that dairy prices "should begin their recovery two to three months down the track", and are sticking with their $5.70 season-end pick for the new season, though do caution that "this auction result adds some downside risk to this forecast", but the recent fall in the NZ dollar balances this risk .
However, Westpac senior economist Michael Gordon says the Westpac economics team now expects a farmgate milk price of $5.40/kg for the new season, down from a $5.70/kg pick before the latest fall in global dairy prices.
"This is a little higher than Fonterra’s opening forecast of $5.25/kg, but both forecasts are contingent on an improvement in world prices over the course of the season. The conditions for such an improvement don’t appear to be in place just yet."
In its latest Financial Stability Report last month, the Reserve Bank warned that financial stress in the dairy sector "could rise markedly" if prices remain at low levels in the 2015-16 season. The RBNZ says that despite many farms being in a position to manage down working expenses, around one-quarter of dairy farms are believed to have had negative cash flow for the 2014-15 season.
Westpac's Gordon said that on top of the dairying sector’s current cash flow concerns, there was a risk that financing conditions could tighten.
"The Financial Stability Report was silent on what action would the RBNZ take if it believed the dairying sector was becoming a threat to financial stability. But we think the most likely response is that the RBNZ would require banks to hold a larger capital buffer against their existing agricultural loans, to absorb an expected rise in defaults.
"If so, the cost of holding that additional capital buffer would be factored into the interest rates for farm lending."
ASB's Tuffley and Penny said they now now expect nationwide production (that's for all processors) to end the season 3% higher than the 2013/14 season – having previously forecast a 2% lift.
"Moreover, during the height of this summer’s drought we had forecast the season’s production level to be on par with 2013/14.
"All up, dairy markets will need time to absorb the extra NZ product from the better than expected end to the NZ production season. As a result, we expect dairy prices to remain weak for another two to three months, before beginning to recover in earnest later in 2015."
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28 Comments
Why no mention of the removal of Dairy farm milk quotas in Europe? Dutch and English Dairy companies are expecting significant increase in milk production from their suppliers. The Dutch dairy coop FrieslandCampina has built two new factories in anticipation of increased milk flow, as does Fonterra, the Dutch will process what ever volume of milk is produced. I can't imagine that increased milk production will be kept only to the Dutch and UK in Europe. It would also be reasonable to expect that increased milk production will not all (if any) be absorbed in Europe. I would expect dairy product prices will remain weak to lower, especially as global economic growth is likely to be lower than forecast.
I suspect that is why Fonterra is rapidly building WMP facilites, for when most of it's markets vanish to subsidised European sources. then they just have to hope for a drought or disaster to make an opportunity.
Just wondering what NZ could develop as a replacement....
There strategy is all wrong, and how long before they change it, well its been years now. they should have been developing and growing sales of produced projects instead of lets get our volume up lets supply the worlds milk powder.
if you look at the 3 V;s it should have been 2 then 3 then 1
But we think the most likely response is that the RBNZ would require banks to hold a larger capital buffer against their existing agricultural loans, to absorb an expected rise in defaults. "If so, the cost of holding that additional capital buffer would be factored into the interest rates for farm lending."
What does this mean?
1. That debt mediation legislation must be passed ASAP - if defaults now the new "expected/black"
2. Wouldn't more capital to support rural lending, make rural loans less risky, so the comparative.margin rate should come down.
3. That Banks been taking too much margin to profit regarding rural loans, given their terrific profits and its their shareholders than need adequately capitalise their business.
4. Do Banks bear responsibility in that their lending cashflow farmgate milk price (LCFMP) will probably be above actual farm gate returns two years in a row. (every GMP 15/16 price level is less banks LCFMP).
For instance you try getting a loan from a bank with your own estimate of farmgate milk price $ to show servicing of the borrowings.
5. Again a fewer reasons to be paying top dollar for milk in Ozz, and bottom dollar here (every 20 to 30 cents/kg is likely to count). - every GMP 15/16 price level is less LCFMP
We said that to Fonterra, when we found out they were quietly building 5000 cow farms in China using NZ animals and IP.
Even time the market price dropped Fonterra blamed oversupply on the market. Which is why they built more big factories, (and outside Intellectually and property safe areas!) ??
We told them it wasn't sustainable, but no-one could force them or hold them responsible, so why should they listen to mere farmers shareholders.
As a (non-Fonterra) director I could get Fonterra to admit where the $7 for GMP was coming from.
They said "it won't affect the co-op milk pool" and "will have no effect on other suppliers payout".
But guys like that have admin staff to chase such things. Real farmers are too busy farming since the window for application was deliberately tiny and during a busy time of year. Completely set up so that the big operations and companies could take advantage.
That's why I got out. The 4.40 payout was a ripoff and would have meant more debt but the signs were obvious, the Company wanted to go corporate and will do so by hook or by crook, over the bones of the small co-op loving suppliers if need be.
That would be reassuring to suppliers CO. The figure of $7 must be a huge embarrassment to the directors now. How could they possibly get that so wrong. As cowboy comments, the effect on this final payout must be substantial. Thats not particularly cooperative amongst fellow suppliers. However compared to Silver Fern Farms history its just par for the course in NZ. When do we see accountability. Mainzeal disaster suggests the heads roll after its too late.
Wasn't the number 25 million kgs milksolids, (was meant to be 40 iirc but not enough interest) . That would mean a loss of $65m incurred either by removing from the milk price or by taking from the companies bottom line. That's about 4cents per share, no small amount in my book from one small wrong guess.
There's more shares than MS now. so 4c a share would be closer to 8 cents. Makes a huge difference when we're talking negative cashflow.
IF there waws $7/kgMS available, *why* didn't that get put in the co-op milk pool?
IF it's not from MS, where is it from and why is it being paid out on a MS basis?
IF the $7 is from MS, how are those MS different from all other MS in the mixing vat/auction?
IF it is for a outside deal, is that legal given the commodity trading rules of NZX and gDT (declaration of available product)?
If it was for speciality milks and it's outside the normal pool that's fine and good.
But if it's standard milk pool milk, and it's a futures deal - who is being fired for being so incredibly inaccurate? And who is taking the counter-party risk? as it better not be the co-op, especially given that the offering was so poorly supported meaning it was unpopular with the number of farmers in the co-op.
All Fonterra would say is that "it doesn't disadvantage other members of the co-op".
How many of the directors and associated persons actually operate farmers (personally)?
Most of the uptake was from corporate farms if rumours hold any factual data. Nothing stopping the corporates connected to directors taking some healthy GMP action as long as the directors haven't tainted the process.
That is why I was tempted to try and get in on the GMP, but I couldn't since Fonterra couldn't explain that the money was clean and co-op based. Get in, because I saw $7 as "plenty" and clearly it was a mechanism created for corporate enrichment, meaning the top knobs at fonterra were happily setting systems up for their big farm buddies. I also had doubts because it was clearly an anti-coop move for the same reason.
Still little comment on Ralph Norris' resignation on the day Fonterra were to give their update. The resignation came instead. The update was made public early in the morning the next day. The two have to be linked. How can they not. Norris must have flabbergasted with the rest of the board. Thats a polite way of putting it. Journalism has gone to pot. Why arent hard questions being asked as to why such a valuable director walked away.
I was speaking to Colin Armer the other day, and he rated Ralph Norris's nous . Personally I wasn't so sure. I recall him being critical of farmers opposition to TAF and Fonterras evolution from a cooperative structure to corporate. My feelings are he may have had business talent and ability, but little knowledge and empathy of cooperative business structures and principles and there value to a diverse range of supplying shareholders trying maximise value and long term stability. Apart from Leonie Guiney, the farmers elected directors have less nous and empathy for cooperative strength, which reflects poorly on farmer shareholders. However bear in mind, voting is rigged in preference to large scale suppliers, and information supplied is distorted through a blatantly cronyistic Candidate assessment process
Omnologo - have you seen/heard anything of the survey that is doing/has done/ the rounds re Fonterra's performance? A non Fonterra West Coast farming mate has a copy of it (goodness knows how they got it). Apparently it has caused some angst among the head honchos in Shareholders Council as it is a shareholder initiative not Fonterra. I haven't seen it and wondered if it's a North Island based thing....
Hi CO, no I haven't heard of such a survey. I farm west of Taupo and most shareholders seem happy to swallow corporate rhetoric spun out from Fonterra and our directors/shareholders council. why do we persist with the Shareholders council? They are pathetic in there role as a watchdog, and the idea that our elected directors time is too valuable to spend interacting with shareholders is weak. They get well compensated, and most are on multiple boards anyway.
if you are not rushing off at lunchtime:
http://www.trademe.co.nz/Community/MessageBoard/Messages.aspx?id=155143…
Amazing how many people seem to be already banking the cash from near-term higher dairy prices. I suspect there's a bit more to play in this saga, prices have not reached their trough, and there won't be much of a recovery. NZ dairy (and much of the wider economy by proxy) is in for a rough ride!
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