By David Hargreaves
Fonterra's sharply reduced the amount of milk powder it will make available on the GlobalDairyTrade auction platform over the next 12 months prior to the next auction early on Wednesday and ahead of a crucial board meeting on Friday, which will deliberate on the forecast milk price for farmers this season.
At the moment Fonterra's forecasting a price of $5.25 per kilogram of milk solids, but following nine consecutive falls in dairy prices in the GDT auction, the last one precipitous, the expectation is that the forecast will be significantly reduced to possibly around $4.00 to $4.25. (See here for our back articles on dairy prices.)
Fonterra, without more broadly announcing that it would cut in its supply to the GDT (IE to my knowledge it told neither the media, nor the NZX in general, nor did it say so on its public website), issued a statement published on NZX Futures last Thursday, in which it said it was cutting its total product available on the GDT over the next 12 months by 47,800 metric tonnes (5.8%) to 800,985MT. By far the biggest reduction was in whole milk powder (WMP), with a 25,450MT reduction over the next three months and a further 20,750MT reduction between November and January.
According to ANZ rural economist Con Williams the total reduction in WMP made available will be 9%. As some means of giving relevance to the figure, ANZ calculates that the 46,200MT tonnes of WMP involved represents an equivalent amount to the entire US export of WMP in the past 12 months.
WMP prices have been particularly soggy in the recent GDT auctions, having dropped by a total of 20.6% across the last two auctions.
Futures trading ahead of the next auction in the early hours of Wednesday would suggest there will be further falls in the WMP prices. The October 15, November 15 and December 15 contracts have been changing hands at -6.2%, -6% and -2.1% respectively compared with the prices in the last GDT on July 15, suggesting further falls in this week's auction. But it does need to be stressed that not all the contract dates registered trades in the last auction and, in any case, the futures prices have not in the recent past offered a wholly reliable guide to what will actually happen in the auctions.
ANZ's Williams had this view on the week's auction: "For us another decline seems likely followed by a period of stability at low levels. The two most likely catalysts for improvement will be China increasing its purchases and/or New Zealand milk supply declining."
In its limited-release statement Fonterra said the key factors that influenced its GDT forecasts were: seasonal changes or weather events impacting its milk supply; production, storage or supply chain constraints; anticipated customer demand from GDT and non-GDT sales channels; and differences in relative returns of products.
"In response to current conditions in the global dairy markets, Fonterra has modified its product mix that will see a volume shift away from whole milk powder and into our other products in the portfolio. In addition, our key customers have responded to global conditions by re-shaping their purchasing profile, altering our forecast off-take profile. On the supply side we have anticipated that our farmers may reduce volumes in response to the current low price signals," Fonterra said.
Farmers facing up to the second consecutive season of poor returns will be looking to what Fonterra announces, presumably late on Friday, after its board meeting. Already the dairy co-operative has said it will axe 523 jobs, intended to save it about $55-$60 million a year. But farmers looking at a $4.40 per kilogram of milk solids price for the recently finished season (down from as much as $8.40 a year earlier) and now facing around $4 or possibly slightly worse for the current season will want to know what Fonterra can do for them right now.
As a very large organisation that is on the one hand directly answerable to its farmer shareholders, but on the other is (albeit less directly) answerable to the New Zealand public for its management of a very significant part of our economy, Fonterra needs to make sure it is communicating clearly and openly at times such as this. The juggling act between the interests of its shareholders and those of the wider public is a tough one, but one Fonterra needs to get right.
In terms of 'openness' of communication, well, this writer is not too impressed with the efforts of Fonterra so far this year. Here's hoping Friday's statement is a wide-ranging and comprehensive one.
Dairy prices
Select chart tabs
26 Comments
Interesting to note that Meadow Fresh was selling at a 35% discount in the major modern trade supermarket in Vietnam y'day, alongside the Aussie and European UHT brands. It appears to be a race to the bottom in this market at least. Sure, this is not China, but it is the emerging China. Selling bulk milk powder may be the only option at the moment.
Meadowfresh part of Goodman Fielder family, now owned outright by Wilmar, the world's largest palm oil processing corporation from Singapore is being very aggressive everywhere, just take a look next time you are in the supermarket. It is very difficult to avoid Goodman Fielder product now, though I seem to be just managing to.
As a dairy lay person I'm trying to understand (1) how will cutting available volumes help when there is dairy supply available from all over the world and (2) how Fonterra then generates revenues needed to pay farmers who will get paid for all milk produced?
Does Fonterra stockpile and sell forward contracts? And if so does this limit Fonterra's exposure to a price recovery if it happens?
The product goes first to highest bidder, when the markets flooded adding more will just decrease the price proportionally. No point selling at loss just to move product, best move is to encourage others to do that. Put more WMP into something useful or store it - its better to dump it and tell farmers not to produce than it is to sell at operational loss.
I remember we tried that with our wool in the late 1980's. Told the wool buyer the price was not good enough and left it in the shed in the hope it would improve. Trouble was we had to fund the cash shortfall at overdraft rates and I dont think we were any better off in the end.
I dont see much sense in storing WMP. A mountain in storage will still effect the price eventually. Let the market decide on the price, the producers either stay in the game or exit based on that price.
By any measure, we have been stiched up by our trade associations with Asia, both buying and selling and maybe we need to bite the bullet now in the hope that the pain is less than it will eventully be if this deepens.
true there isn't much point storing WMP, more than a years worth of trade. That's _why_ Europe had quotas... why else do think they had them? That's why the population limit is a bit flexible, and more about lifestyle balance than mouths. Our production can ramp up so can others, but without means to pay for it, and bodies to consume it not much point... but that's all resources coming out of the ground, that need to be put back.
That all takes humans (Easy) and energy (fossil fuels??) - what would max-out production produce? what number consumers does it need? what density are we willing to put up with? And what kind of social spread? What would all these consumers _do_ with themselves?
NZ's bonus was we could increase out trade 50% all get rich, and still not dent the deep markets. But balance of trade, and the markets themselves have to want the product, otherwise why are we doing it?
So it works out better to _not_ produce (thus not have operating costs) than it is to have negative margins (ie have operating costs and not cover them). that avoids the storage risk, and the need to eventually dump old stock somewhere. That's the difficulty with storage of product, the customer always knows it's there so doesn't bid high for shortage of supply - also they can be sued for market manipulation.
And you can't blame the Asians. they're trading smart....and people like myself were shouting from the roof tops about the problem. caveat emptor.
I get how a market works - thus my questions. Are all dairy producers worldwide running an operational loss at the moment? If not, it is another producer with a lower cost base who gets the most benefit from Fonterra holding volumes off the market.
What you are effectively saying is that Fonterra is a marginal/swing producer of WMP at current price levels? Or is everyone running a loss and no one has blinked yet?
As I'm sure you know, The EU recently freed up it's quota system, and Ireland in particular, is out there to gain market share (at any cost?). But it's probable that everyone has been withholding supply over recent times, hoping for that 'return to normal' to sell into. Given that China has also been stockpiling (and really doesn't want any more at this stage) then we appear to have (1) Oversupply (2) Over storage (3) Lack of demand and (4) Production below cost to access the market. If there was ever a set of circumstance shouting "Things have changed! It's not cyclical, it's structural" this might be one of them
Europe is awash in cheap milk powder, and the European Commission has agreed to extend the deadline for
intervention purchases of both SMP and butter to the end of the year, eschewing the usual September 30 cutoff.
As the Daily Dairy Report noted earlier this week, “[The program] could tighten available supplies of SMP
because the product purchased by governments tends to stay off the market for longer periods of time compared
to purchases by end users.” The government could purchase up to 240 million pounds of SMP, the equivalent of
92% of record-high manufacturers’ stocks of NDM in the U.S. at the end of May. If prices remain low, they
could purchase an equal amount when volumes reset at the turn of the year. While this may reduce supplies for a time, milk powder will hardly be scarce. Stockpiles are large to the point of being burdensome in China and the U.S. and also in New Zealand, according to Friday’s edition of the Daily Dairy Report, an unusual and disquieting situation for the island nation as it starts a new season.
http://www.milkproducerscouncil.org/updates/073115.pdf
They aren't cutting supply.. just cutting the volume available on the auction which therefore has the appearance of cutting supply, hoping to prop up the price. Just sell the products outside the gDT to other customers, or auction customers after price is set by gDT.
Fonterra is a co-op - the processor, Fonterra still gets their Margin for costs, the Farmer gets the balance.
I'm not blaming the Asians. Its our fat lazy western privileged society that is the dummy here.
The Chinese haven't fired a shot yet but have got a fair way along the road to having some significant say in our economy.
We thought it was a great wee lark to sell our produce on a high and buy their goods in on a low. We didnt care if the average Chinese worker laboured long and hard for song as long as we are saving our money on the Alibaba site !
Meanwhile, we have eroded our productive skill base, lost our manufacturing plants, lost the work ethic to the extent that many farmers actually prefer migrant labour now and are just waking up to the fact that the grand plan was a failure.
A great country of followers we are !
speak for yourself Colt 45.
I've done a lot of work in the horticultural and forestry sector in New Zealand and have worked alongside some of the hardest working people you're likely ever to know. We worked on piece rates, which is purely a device to drive worker productivity and it certainly achieves this goal though its certainly not a regime in the best interests of workers. All it does is both shorten the time in which the workers are employed and transfers income from those who are physically incapable of keeping up to those more able. Both of which are beneficial to the employer of course.
Farmers are only now waking up to the facts? We in the working class and the intellectuals who profess to speak for us (Jane Kelsey, Brian Easton, Tim Hazledine, Matt MacCarten) have known it been a mirage of fictitious prosperity, which has been nothing more than a transfer of wealth between the public to the private sector, and from one social class to another. You all denigrated and maligned us for being "out of touch" academics or an unwashed, lazy rabble who just didn't want to work hard and succeed in the brave new world. Now the jokes on you guys. It was okay, when you were all doing well, but know this, your success was at the expense of working people like me and my father who dedicated his working life (33 years) to the railways only to be disposed of like yesterdays Ipod in the name of "efficiency" and "competitiveness" only for idiotic politicians and corporate managers to run the railways into the ground, showing they couldn't organize a pissup in a brewery.
Yes you are all a bunch of followers demonstrating an uncanny similarity to our national mascot and I'm not talking about the Kiwi.
Auctions are great when you have 5 houses for sale and 60 buyers. When you have 60 houses and 5 buyers the wheels come off.
We have set ourselves up to increase production not decrease it. Trying to get into reverse at 60mph is going to be a challenge.
http://www.stuff.co.nz/business/farming/agribusiness/70683745/water-on-…
I would think Fonterra would want to wind up the auctions in the next little while. More product coming on stream, high costs in production and processing industries. No easy answers, heads should roll at MPI for there doubling exports by 2025 campaign. Here is the big fat finger of government where it doesn't belong.
MPI
The export goal
The goal is to double primary industry exports in real terms from $32 billion in June 2012 to over $64 billion by 2025. Learn more about how we plan to achieve this.
https://www.mpi.govt.nz/about-mpi/our-strategy-2030/the-export-goal/
Look what happened to the guy who was CEO when the export double goal thing was launched.
http://www.lic.co.nz/lic_Staff_Profiles.cfm?staff_id=76&cid=4
Maybe one of MPI's mistakes was to confuse WMP with higher value consumer products?
The long-term growth prospects of New Zealand's primary industries will depend on how well we are able to fine tune our response to trends, such as rapidly increasing demand for higher value consumer products from Asia's growing economies, with improvements in the productivity and sustainability of our primary industries.
Something Just Snapped: Container Freight Rates From Asia To Europe Crash 23% In One Week
http://www.zerohedge.com/news/2015-08-03/chinese-economy-crashes-2-year…
Not only but also.
Commodity Rout Spurs Worst Resource Currency Meltdown in 7 Years Read more
Just as Sydney House Prices Soar to Biggest Gain in 13 Years Read more,/a.
maybe its hit its top
http://news.domain.com.au/domain/real-estate-news/price-of-sydney-homes…
well folks, its looking like another 10% fall overnight http://www.odt.co.nz/news/business/351282/milk-powder-prices-will-fall-…
I think we should have all listened to the government...silly us.... we have been told for the last 20 years that we need to move into higher add-value exports.
Its not the chinese fault. They are saving australian milk farmers and rescuing them by buying their financially distressed aussie farms at "fair market value". This was never their aim. They will come to the aide of NZ too (free trade agreement yay!!!) and save our milk farmers too by buying our dairy farms and that means they wont have to bid on the GDT if they can buy the asset. Our farms are too over-valued anyway, and the banks wont mind, theyve got the govt their to bail them out. Thats the new free market for ya. So dont worry, the chinese and the govt will rescue us all and maybe we can get $2 for a 2 litre milk which means maybe I can actually afford to drink a glass of milk. And I hear Pahiatua is doing well these days, fonterra is buying storage sheds for their product they plan to store.
Oh well I guess this export boom which has "filtered down to everyone" will just have to stop. I guess all those poor people who can't afford milk will have to give back the money that the farmers "filtered" down to them.
But seriously folks... its time milk became affordable to the average kiwi and its time those who are over-extended fail. That is the true free market. But wait, these guys are national voters! we cant have that!
thanks for the correction BW... here the link for anyone interested. Worthwhile reading if i do say so myself http://www.rbnz.govt.nz/regulation_and_supervision/banks/policy/4368385…
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.