By Keith Woodford*
This week is important for all New Zealand dairy farmers. The key announcement will be Fonterra’s decision as to the advance price for milksolids, which will be paid to farmers during the first half of the forthcoming 2015/16 season.
In contrast, most media discussion as to milk prices for the forthcoming 2015/16 year has been and will be about what Fonterra will estimate this week as the expected overall price per kg milksolids for the coming year, which runs from 1 June 2015 through to 31 May 2016.
Most pundits are suggesting an overall expected price for 2015/16 of between $5 and $6 per kg milksolids.
But right now that estimate, which is little more than a guess, is largely irrelevant. It is the advance price that counts down on the farm, but which the media largely ignores.
The Fonterra advance payments are also important for Synlait and Open Country suppliers. These investor-oriented companies pay whatever they need to stay competitive with Fonterra.
Fonterra pays what are called ‘advance’ payments on the 20th of the month following when the milk is received. The rest of it dribbles in through to October of the following year.
In a normal year, Fonterra pays these so-called advances at about 65% of the expected final payout. But this year could be different. That is because Fonterra’s own cash inflows during the first half of the year will be modest.
Fonterra is already selling early season milk on the GDT auction platform, despite the milk not having been produced yet. There is nothing wrong with that; in fact it makes lots of sense if trading is to be at least somewhat orderly. However, the prices at which this milk is currently being sold will only support a final payout of about $4.50 at best.
So how should Fonterra price the advance payouts? Should they be priced as a percentage of the early season prices, or should they be based on best estimates of the final price?
If Fonterra bases its advance payments on the current prices, then some farmers are in for a shock. The advances could be well under $4, with a likely figure being in the ‘low threes’.
If Fonterra bases the advance on overall expected prices, then the advance could be closer to $4.
The problem with the second scenario is that the overall price for the coming 2015/16 season is still such a guess. Despite the pundits predicting prices between $5 and $6, the reality is that it could be anywhere between about $4 and $7, or even outside that range.
Last year at this same time, Fonterra was predicting $7 per kg milksolids for the 2014/15 year. Yet the latest estimate for the 2014/15 season, which is now about to end, is $4.50. Surely that should convince everyone that estimating milk prices this far out is almost total guesswork. Quite simply, no-one knows.
Everyone knows that international dairy prices are currently very low, but less well understood is the lags inherent in the system. Given those lags, most farmers will have received milk cheques during the current 2014/15 year in excess of $6 per kg of milksolids actually supplied. This is despite the estimate for the year about to end as being $4.50. It is only now that the cash crunch is beginning to bite.
Most farmers will receive some very modest payments in June for their May production, nothing in July, and then some tiny retro payments in August, September and October.
The new season’s payments will include the advance payment on 20th September for August production, with increasing payments in the following months as spring production cranks up. But if advance payments are only in the ‘low threes’, then for many farmers the overdrafts will continue to rise.
Down on the farms, there is a lot of frustration at Fonterra’s failure to accurately predict prices. But that is not Fonterra’s fault; it is the simple reality of global commodity markets.
Ironically, part of the volatility that we now see in international markets is a function of the open- market free-trade policies that we in New Zealand have advocated for so strongly. Whereas in the past, both Europe and the US would beat to their own drums in terms of production and pricing signals, everyone is now responding to the same international free-market signals.
Commodity markets can be very profitable. Australia’s wealth is built on mineral commodities, Saudi Arabia and Norway have built their economies on oil as a commodity, and New Zealand has itself done rather well from our agricultural commodities. But the nature of commodities is that they are very volatile.
For the last 15 years, I have been telling Lincoln University students that I can guarantee that at some stage of their professional careers they will face a major downturn, but that neither I nor anyone else can tell them when that will happen. The trick is to have thought out in advance how to deal with that downturn, and not to make silly decisions in a panic.
Currently, I am seeing some indications that not all of the advice that farmers are receiving is sound. There are many costs that can be forestalled, but there is no point in saving costs unless those savings exceed the consequent loss of income in the same season. The key issue is that hungry cows punish their owners. I will have more to say on that at another time.
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Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. He will be writing a regular column here. His archived writings are available at http://keithwoodford.wordpress.com
19 Comments
... can't help but feel that $ 4 is a psychological tipping point ...
If Fonterrible set a figure below that , the bubble will burst , conversions will freeze up , the whole industry will go into shock ...
... and farm prices will drop ... late entrants into the industry face a chilly winter in their discount tent ...
The Fonterrible management have no better chance of accurately picking future milksolids prices than anyone else ... otherwise they'd be professional commodity traders ... and making better money on a trading floor elsewhere ...
And one of the Three Amigos, The Grocer, is now telling Canadians (where they have corn fields the size of NZ) that their Dairy industry needs to modernize away from domestic supply (my words - his were something like "inward looking and Soviet Style"). Imagine the fontera payout if that wall of corn became export milk!
European milk production got off to a slow start this spring, prompting
speculation that producers there had sped up their post-quota expansion
plans, enacting them last year when prices were high. Under this theory,
European milk output was expected to be steady in 2015, despite
producers’ new freedom. But now unofficial reports suggest that output
in Northern and Eastern Europe is on the rise. European driers will be kept busy.
U.S. milk production remains strong. In April it totaled 17.8 billion pounds, up 1.7% from a year ago. Output in
California slipped 2.1% from a year ago, and production in New Mexico and Oregon also fell short of last year.
But milk is flowing in the Midwest. Output in Wisconsin, the nation’s second largest dairy state, rose 4% from a
year ago. Production rose 6.5% in Michigan, 6.8% in Kansas and 9.8% in South Dakota.
Page 2 of 3
All that milk is keeping cheese vats full. Dairy Market News
reports, “Heavier milk intakes are already placing strains on
manufacturers and milk handlers. Driver availability is limited
and milk tanker receiving has been delayed in some instances.
Processors are anticipating the challenges will be compounded
over the holiday.” It may be some time before the pressure
abates. According to Dairy Market News, “Even if the flush
begins to recede, new milk supplies available from expiring
school year fluid milk contracts are expected to maintain
strong milk availability for cheese manufacturing in the near
future.”
Lack of capacity and resulting discounts may provide the only signal to producers in the Midwest that they ought
to slow milk production, and many are likely to ignore it. Although $16 or $17 milk is certainly not exciting after
last year, in light of falling feed costs and diminished debt levels, dairy producers in the region have little
incentive to empty their crowded barns. Some producers have completed expansions, and the dairy herd has
grown by 6,000 head in both Iowa and South Dakota, 9,000 head in Wisconsin, 12,000 head in Idaho, and an
astounding 20,000 head in Michigan. There is likely more to come. Construction of new facilities that were
begun during last year’s boom are not yet complete. They will continue to augment year-over-year growth in cow
numbers in the coming months.
http://www.milkproducerscouncil.org/updates/052215.pdf
Only when you compare it with a) loss leader strategies in Australia b) watered-down alternatives in the US and c) subsidised and price controlled EU prices. I doubt NZ taxpayers or voters would put up with such artifical distortions here. Everyone wants 'cheap' with someone else paying.
I doubt NZ taxpayers or voters would put up with such artifical distortions here.
You may also realise,if your observant, that many farms are currently "dry" with those producing winter milk being paid much more and yet the price for the consumer remains relatively consistent. As soon as Fonterra gets itself out of DIRA then you will really be able to complain about price, if you can get it.
It does not matter for the NZ economy what the dairy products return on the export market, or other exports for that matter. In Auckland we have never made so much money buying and selling houses to each other at higher and higher prices and this will continue regardless of export prices!
The Government believes this is the road to riches as they have not done anything major to prevent us making a lot of money from our houses. Who cares about exports!
Considering that Fonterra can afford to build huge powder factories and warehouses, pay megabuck$ into a pointless rebranding of it's rural retail stores, completely overhaul it's website with the ugliest thing I've seen on the internet in 20 years, and set up 3 huge milk making factories with 5000 cows a piece in direct competition with NZ supplier-shareholders, and pay a huge amount for Chinese company shares, AND have a decent payout in Australia where they were have supermarket price wars...
then Fonterra should be paying out $5.00 , the minimum cost of production for it's NZ supply.
Why? Because Fonterra is the party that puts the price tag on the milk, farmers have no input about setting the price nor have they any influence about what is done with it.
Fonterra needs to be the party taking the risk, and the duty to see they're paying fair price (as they're the representative setting the price at both ends).
With all that spending, if Fonterra are making a profit elsewhere in the organisation, it comes because they're paying very little for the raw product. A product that the pricing control is _entrusted_.
the farmers supply to the detailed standard, and the product and quality was accepted by fonterra's on set of regulations.
Given that they can profit from their other product lines and services, they have a clear duty to see that the supply price is above breakeven ($5) because otherwise they're _price tampering_ by allowing the price of their raw product to drop below cost of manufacture. Tampering because they, not the supplier, controls the pricing, although they try to palm this off via auction, the fact is that it is their auction and their decision to create the auction price (against protests that _exactly_ this situation would arise. Fonterra has duty of care to it's shareholder suppliers, and fair contract business partners (sharemilkers) to ensure that Fonterra does not take undue advantage of low pricing caused by it's actions (ie that which would be equivalent to price tampering/fixing)
Spoken like a true non-shareholding sharemilker, lol. Farmers, and it wasn't just corporate ones, voted for TAF no matter who pointed out the end result. Blind and deaf.
What ever happened to the anti TAF women from down south, been re-educated now she's on the inside?
Thumbs up from me.
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