Volumes of whole milk powder (WMP) sold by Fonterra on GDT have plummeted, falling 23% year-to-date on last year and 13% behind even the drought year of 2012-13.
The co-operative began cutting offerings in November even though production at the time was still tracking 4% ahead of the previous season.
AgriHQ dairy analyst Susan Kilsby said November 18 offerings of WMP were 27% down on volumes the co-op had signalled two months before the auction.
December 2 auction offerings also followed the trend and were down 20% or 12,000 tonnes to 25,650t compared with what it had earlier forecast.
At the time parts of the country had received lower rainfalls than average through spring but production was still ahead of the same time the previous year, a record production year.
Commodity prices though slid faster and further than analysts had expected – diving from all time highs that peaked at a little more than US$5000/t in February 2014.
By October they’d plummeted by more than half to US$2400/t.
“Market indications were that prices were unlikely to recover quickly and expectations were for them to stay down in a trough until into the new year,” Kilsby said.
Global supply was strong and the supply chain in-market was showing signs that inventories weren’t depleted so demand was sluggish, she said.
“The decision to pull product off GDT in November definitely wasn’t driven by supply – pricing and an aim to earn more by selling off GDT was more likely to have driven GDT volumes down then.”
Since November, Fonterra’s total offering across all products on GDT had been down significantly even on the 2012-13 drought-affected year.
While the forecast volumes in March and April were closer to offerings in the same months in 2013-14, the forecast volumes for May, June and July are well down.
As dry conditions began to bite in several parts of the country in January and February and drought was declared, Fonterra moved to adjust its total production forecast for the season down.
The co-op’s milk supply forecast was cut to 1532 million kilograms of milksolids (MS) in late January, which was 3.3% down on last season’s record production but still ahead of the 2012-13 season’s drought-affected supply of 1463m kg MS.
GlobalDairyTrade whole milk powder prices vs volumes
While GDT prices for WMP climbed 73% from the end of January to the end of February and, providing they continued to strengthen, would support milk price forecasts it was difficult to predict profit expectations and therefore dividend returns.
Farmers have been hoping to see a lift in dividend returns when the company makes its interim financial announcements later this month to boost the flagging milk price and improve their overall payout.
Last season unusual differences in stream returns meant Fonterra diverted away from the Milk Price Manual and set a milk price below that advised by the manual.
It paid out a dividend of 10c/share. Investors in Fonterra’s shareholders fund units will also be expecting much improved returns on last year. In September Fonterra widened its dividend range forecast from 20-25c/share to 25-35c/share.
However Bascand said while farmers and investors would like to see the current forecast move upwards again any significant increase was unlikely.
He said Fonterra had committed to a significant amount of capital expenditure for expansions in New Zealand-based production capacity and investments such as the Beingmate partnership.
Last year the co-op announced it would spend $555 million on a new dryer and further expansions at Edendale as well as a net $615m on the Beingmate partnership.
Combined with other expansions in NZ the total capital investment amounted to close to $1.8 billion.
At the time Fonterra chief financial officer Lucas Paravcini said the investment would increase Fonterra’s debt-to-debt plus equity ratio from 42.4% to 45.1%. Fonterra’s target range is 45-50%.
“The balance sheet is relatively full and there’s little headroom on it for further debt,” Bascand said.
Fonterra is likely to stick closely to its retentions policy of paying out 65-75% of its distributable profit, with farmers and investors hoping it tends towards the higher end.
Just what that profit is likely to be will be clearer following the interim results release.
Fonterra’s February global update showed second-quarter revenue per tonne of reference commodity products (products used to calculate the milk price) decreased 37% compared to the same period last season, while revenue per tonne of non-reference commodity product decreased 17%.
Reference commodity prices in 2013-14 reached record levels and peaked in February while this season they are at historically low levels accentuating the percentage drop.
Non-reference products have declined at a slower rate and their performance relative to reference products has improved.
On the sales front volumes of product shipped quarter on quarter were similar with Asia, the Middle East and Africa increasing their purchase volumes while Chinese-purchased volumes of WMP were down.
The sales volume of non-reference products in the second quarter increased 16% reflecting a change in product mix towards cheese and protein to maximise returns.
Bascand said three main dynamics had been at play over Fonterra’s sales season:
• Volumes had been taken out of GDT
• An increased volume of product was being sold on GDT-plus contracts
• Drought had reduced forecast volumes for the second half of the season.
