By David Hargreaves
Fonterra's farmers say the cut in forecast milk price to $4.50 from $4.70 per kg of milk solids announced by the dairy giant co-operative will be a "difficult pill" for them to swallow and they are "disappointed" .
Fonterra Shareholders’ Council Chairman, Ian Brown said the reduced forecast demonstrated that, as with other industries in New Zealand, Fonterra and its farmers are subject to the volatility of the global economy.
“Moving forward Farmers will be looking to their Co-op to drive value from the milk they produce and take advantage where possible of the low Milk Price environment we are experiencing.
“It’s a given that Farmers need to continue be especially prudent with their financial planning and focus on getting their farm businesses in the best possible shape for next season."
A combination of the Reserve Bank officially indicating a move to more of an easing bias on interest rates and the announcement from Fonterra saw the Kiwi dollar drop sharply, from a shade under US77c to about US76.1c.
Fonterra kept its dividend forecast range unchanged at 20-30c a share - though it had dropped this forecast range by 5c only about a month ago.
And Fonterra has again, following on from a month ago, increased its forecast of the amount of milk supply in the current season.
Earlier drought conditions had been expected to trim the output quite markedly this season, but now Fonterra is estimating New Zealand milk production for the current season of 1,607 million kgMS, which is up from a forecast of 1,551 million just last month - and actually now puts the forecast production for this season about 1.5% ahead of last year's figure.
The significant thing about that is that the latest anticipated rise in production forecast comes at a time when global prices are being affected by over-supply.
Based on those updated production figures, the returns for Fonterra farmers alone are looking like being about $6 billion down on last year, when the milk price was $8.40 and the dividend 10c.
After the reduction in the milk price forecast, Fonterra is now forecasting a total cash payout of $4.70 - $4.80 for the current season. At the very start of the season - when global prices were much more buoyant - Fonterra was actually forecasting a milk price of $7.
Labour's finance spokesperson Grant Robertson suggested that the latest update from Fonterra confirmed that "an economic black hole of $7 billion" was opening up that would seriously affect the regions.
"The Government has repeatedly refused calls to help diversify our industries and export markets so that the country and local communities are not hit hard when a commodity price falls," he said.
“National has created an economy of milk and speculating on houses and pretended that it will continue to flourish. But the cracks are showing."
Fonterra's chairman John Wilson said the latest reduction in forecast milk price reflected the "continuing and significant volatility in international dairy commodity prices caused by over-supply in the market".
“We have confidence in the long-term fundamentals of international dairy demand, however the market has not yet rebalanced and GDT prices for products that inform our Farmgate Milk Price have fallen 23 per cent since February."
Wilson said the reduction would "impact" cash flows for our farmers, and they would "need to continue exercising caution with on-farm budgets".
“Our farmers are already managing very tight cashflows. Although this reduction is not the news that anyone wants, it is important we keep our farmers updated given the significant market uncertainty.
“Given the reduced Milk Price forecast, we are also lowering the Advance Rate of scheduled monthly payments to our farmers.
“We will continue to keep our farmers updated as the season progresses,” Wilson said.
Chief executive Theo Spierings said geopolitical unrest in places such as Russia, the Middle East and North Africa is impacting global dairy demand.
“Remote as they are, events such as the flow of refugees from Libya to Europe come together with factors like lower oil prices to soften dairy demand,” Spierings said.
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31 Comments
Bit over 30% cut meself. But whatever.
Just read that NZ has the highest number of coffee roasters per capita in the world. Imagine how much up against it dairy farmers would be if the we weren't on a flat white binge compared to the old days of just a splash of milk in our coffee?
just don't go working out the milksolid price they're selling the Lattes.
At 4.70 that's bare bones opex for me. I get wages as the business is set up as a Limited Liability Company in case it ever looked like a franchise or private share offer was in order. Under 4.70 I lose wages out of my contracted pay, under $4 the bank/landlord has to start taking a haircut. And my operation was _very_ cheap - my bank repeatedly asks me if my figures are correct because all my P/L, BalSheet, Budgets are well under their metrics.
My wage was $15k for accepting the NAIT responsibilities
$25k as Manager (and Director) for what was supposed to be "reasonable efforts" (vs best efforts) for 20hrs a week. Many times ended up doing 15-17hrs a day, 7 days a week.
But thankfully unlike the government subsidies given to military, police, teaching... farming doesn't produce anything necessary to the community.
Fonterra wonders why farmers are leaving. The Stuff report on this is dated: Last updated Wed Apr 29 21:16:03 UTC 2015. The email to me as a shareholder and whose business is impacted by it is Apr 30 08.47 2015.
http://www.stuff.co.nz/business/farming/dairy/68154074/fonterra-cuts-mi…
Given that COGS is in the range of $3-$3.50 for a low-inputs configuration, and $4.20-$4.50 for a more complex deal, that doesn't leave much for Interest on debt, drawings, capex etc.
Domino effects on vehicle and plant sales will surely have been noticed by now....
as said elsewhere "NZ definitely has it leaders"
Are our politicians and government and OIO so incompetent that they did realise what would happen if they allowed currency to pour into the country? They must be truly incompetent if they couldn't see that happening.
I do have to wonder though - the high infant formula prices, Fonterra's big sell and commitment... whether it was Bearing Mate that bid super high for last years production - and Fonterra have got told they have to accept shares as payment not cash, if they want to see they payment.
Would fit the picture, and what we're not being told....
$6-7 billion less income this year, the banks will be grinning.
Farm sales are still on a high.
As an export led economy we are celebrating parity with our biggest export market.
Our top two export markets are showing signs of stress.
Demand is down, supply is up.
We are the rock star economy!
... thankfully , the other leg in our two pronged economy , the Auckland house market , is still chugging uphill quite nicely ...
If that little bubble bursts too , the star economy will definitely founder on the rocks ...
... c'mon BigDaddy , Your Landlord ... get cracking youse guys and buy something in Auckland ... the entire Kiwi financial system needs you to keep it inflated .... buy any frigging thing ... something a $ million + with a rubbishy W/B house on it would help us all ...
You know , " you can't lose with property " .... mate !!!
"“We have confidence in the long-term fundamentals of international dairy demand, however the market has not yet rebalanced and GDT prices for products that inform our Farmgate Milk Price have fallen 23 per cent since February.""
David could you rephrase that in terms of actual farmgate milk price _margin_ reduction?
The problem we have is signals.
The $7 start to the season wrong footed many. The generous advances while well intended, many have compounded the first mistake as did the its all on $3,500 a tonne. Now all have gone.
take a minute to see here
http://ifsa.boku.ac.at/cms/fileadmin/Proceeding2014/
got to
pager 1438: WS_2_7_Dalley.pdf 25-Jul-2014 11:25 259K
These numbers were done at $6.65 a kg.
you can see how the higher stocking rate produced 28% more ms, for an extra $200 profit per ha.
run the numbers at $4.50.
the lower stocking rate still shows a surplus, with less ms produced. (less ms to sell would assist the gdt price).
the high stocking rate makes nothing (before i, capex, drawings, repayments etc, etc). but gives 28% more ms to sell...
this example shows the extra 500 kg costs say $6.22/kg
.
(We can show you folk now who do more than 1 ton of supplement per cow and greater than 2,300 kg/platform ha).
anyway you get the picture, it didn't have to be like this..
who picked the $7, the $6, the $5.3, the $4.7......and can the TAF designer explain the dividend?
http://www.stuff.co.nz/business/farming/opinion/64341421/advance-paymen…
Fonterra's initial base rate for 2014-15 was $4.48/kg of milk solids when its first forecast for the season was $7 a kg/MS. That later fell to $6 then $5.30.
A spokesman for the Fonterra Shareholders Council said the base rate would usually increase throughout the season, but not this time.
I like this outfit, works for me, they have been trying to get farmers to drop cows and costs for years.
http://www.grazingsystems.co.nz/gsl-integrated-resource-allocation-farm…
Personally I've seen very few farms that can out profit low input we'll run farms AND fully repay for all the extra hours and stress. After I've milked cows I don't have to do anything else, I usually do to keep things running smoothly but unlike "higher systems" there's no necessity to then feed out load up etc. We're still going to make a profit be it a bit smaller than last year.
As to the dividend, I can explain that. The company and its three Vs is a dog. They were 50cents of making a profit last year and this year they have had to increase borrowing hugely to maintain capacity and pay a very small dividend.
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