Both Fonterra and Westland Milk Products slashed their payout predictions late last month, with Fonterra forecasting a $6/kg milksolids (MS) milk price and a dividend range of 20-25c/share. Westland cut its forecast to $6-$6.40/kg MS.
Baker and Associates dairy farm consultant and winner of this year’s Farmax consultant of the year DairyNZ Dairy Farm Consultant of the Year award, Chris Lewis, said washup coming through to bank accounts from last season’s record high payout will help farmers’ cashflows “hold water” through the early part of this season. But how they cope further out will very much depend on their ability to control spending before the new year.
“The early timing of the cut means we’ve got early notice so we’ve got time to navigate our way through this,” he said.
“The message is don’t panic, but budgetary control is going to be crucial to ensure we’re not looking at big problems in six to eight months time.”
Farmers needed to be thinking about the optimal system for their property, reassessing cow numbers, looking at the level of supplements they intend to feed, and working out where the most profitable point is for them.
A high proportion of the season’s onfarm costs are set and paid for before the end of the year, especially supplementary feed costs, so getting to work right now to revise farm management decisions, despite the busy calving period, was imperative.
Farmers who had made hefty capital infrastructure investments should be working with their financial and onfarm advisers to limit any pain later in the season and ensure banking facilities could accommodate tighter cashflows.
Big payout highs followed by big lows weren’t unusual in dairying’s recent past and with proactive management farmers would get through this trough but dairy farmers generally needed to sharpen up their financial management skills, he said.
Along with the forecast milk price drop Fonterra has revised its advance payment schedule and done away with step-ups in its base advance payments that had been timed to start from October.
Whole milk powder futures prices are on the rise but already factored into milk price forecasts.
Under the revised schedule farmers will now receive $4.48/kg MS base advance and 52c/kg MS capacity adjustment to give $5/kg MS right out to their May payment for milk produced to the end of April. But for the four months from October to January they’ll only receive the base advance payment without the capacity adjustment under Fonterra’s new system.
NZX Agrifax revised its forecast milk price down to $5.95/kg MS earlier in July.
NZX Agrifax dairy analyst Susan Kilsby said that move had been based on the continued drops in GlobalDairy Trade auctions through June and July, the NZ dollar and NZX Dairy Futures market prices for the next six months, coupled with expectations for commodity market movements beyond that.
Given that Fonterra and a number of its customers traded on the futures market and the continued increasing liquidity of it, the market was the most transparent indicator of future price direction over the period it covered, she said. It showed an upswing in prices, but an upswing is taken into account in both the NZX Agrifax and Fonterra forecasts.
Fonterra chairman John Wilson said setting price forecasts at the start of the season required a significant amount of work in analysing expectations for market conditions further out and while improvements in pricing were anticipated in 2015, exactly when they’d be arrive and at what rate they’d rise was still uncertain.
“Our forecast is our best estimate of where this season’s price will end up,” he said.
The dividend forecast, at 20-25c/share is, as expected given lower commodity prices, up on last season’s predicted 10c/share. However Wilson said the dividend forecast for 2014-15 included no influence from stream returns.
The co-operative had thought it prudent not to factor in possible stream returns, given the volatility in markets, especially in Russia where cheese is a major import.
Last season NZ’s record peak milk flows and Fonterra’s processing asset mix meant it was forced into producing more of the lower earning products such as cheese and casein than it wanted to. The margin between prices for those products and powders was far greater than it had historically been and meant Fonterra had to divert from the milk price manual calculation that assumes it acts like a theoretical, most efficient processor.
With the slump in milk powder prices the gap has narrowed, and if a more typical margin remains, some upside to Fonterra’s earnings predictions could be possible.
Wilson said in the past, when making earnings and dividend range forecasts, stream return estimates had been included based on historical trends but extreme volatility in pricing and market conditions meant this year that hadn’t been the case.
Fundamentals driving this season’s woes began last year with an exceptional production season for NZ followed by good conditions worldwide and record high prices driving production from all the major milk-producing regions of the world.
China’s buying spree in the first half of this year accounted for strong demand with Chinese whole milk powder imports totalling 330,000 tonnes in the first quarter of this year compared with 193,000t for the same period in the previous year.
“That’s up 72%; the second quarter (Q2) was up by a similar percentage with 200,000t imported over that period compared with 114,000t for Q2 the previous year,” Kilsby said.
While growing demand in China had been behind the increased imports some buyers had also been motivated by big gains made in the previous year by those who had been able to get hold of product when it had been much scarcer.
Since Q2, high inventories and some demand burn-off due to high prices meant China had been largely absent from the market with some traders believed to have been burned badly after being caught out holding large volumes of product they’d paid big prices for, after prices tumbled.
