Doug Steel of the BNZ said the 2014-15 milk price forecast announced today by the dairy giant was in line with his predictions, but it was “very early days” and the industry would be back to closely watching Fonterra’s Global Dairy Trade auctions and global markets.
The forecast milk price for the 2013-14 season has been cut by 25c/kg to $8.40, following a string of softening world commodity prices.
The forecast was higher than predicted by several industry players, some of whom were expecting it to be as low as $6.40 given an anticipated rise in world milk supply and softening prices.
Fonterra’s reduction in milk price for the season just ending, also announced today, will mean about $460 million less for the economy than anticipated, Steel said.
The forecast milk price for the 2013-14 season has been cut by 25c/kg to $8.40, following a string of softening world commodity prices.
The revised milk price means an estimated $15.5 billion for the New Zealand economy from this season, compared to $9.7b for the 2012-13 season, Steel said.
This season’s dividend of 10c a share was reconfirmed.
Waikato reaction mixed
Waikato dairy farmers have had very mixed reactions to today’s milk price forecast announcements from dairy giant Fonterra.
New Waikato Federated Farmers president, Chris Lewis, said the $7/kg opening forecast for the new season starting this weekend was a pleasant surprise and the 25c/kg cut in the 2013-14 milk price forecast was “neither here nor there”.
Lewis, a large scale farmer at Pukeatua, supplies Open Country Dairy, but as the dominant processor in the $14 billion dairy industry Fonterra’s forecasts set the minimum national milk price.
However, Cambridge farmer Dean Bailey said he was surprised at the reduction from $8.65/kg to $8.40/kg because farmers assumed it was based on much of the current season’s product being already sold.
He was pleased though that the opening forecast had a $7 in front of it instead of the widely
predicted $6.
With Fonterra trying to keep its suppliers on an even keel the last thing they needed was the milk price tumbling from $8-plus to $6, Bailey said.
Lewis said the opening forecast was better than expected and was very positive news for the country’s 14,000 dairy farmers and the rural services sector, which supported tens of thousands of jobs.
Industry watchdog full of praise
Meanwhile, Waikato farmer Ian Brown, chairman of the Fonterra Shareholders Council – the dairy co-operative’s watchdog body – said a $7/kg milk price forecast for the new season showed Fonterra leadership was putting every effort into maximising payout for farmers.
Brown said the opening forecast for the 2014-15 season which begins next week was very positive, as was an $8-plus milk price for the 2013-14 season despite the 25c/kg reduction.
He said the downward revised current season forecast was not totally unexpected given the recent string of falls in the average price on Fonterra’s GlobalDairyTrade auctions, seen as a barometer of world commodity prices.
“Where they’ve landed (with both forecasts) shows they are putting all the effort they can into maximising payout to farmers.”
Stronger cashflows predicted
Fonterra’s $7/kg opening season milk price means dairy farmers could have stronger cashflows this new season than even during the bumper 2013-14 payout year, a specialist industry accountant said.
Nigel McWilliam, of Waikato’s Diprose Miller firm, said the $7 milk price would strengthen cashflows in the season starting next week when added to deferred payments from the 2013-14 season.
Farmers have not yet received full payment for 2013-14 season milk and would be getting 40c/kg a month during the winter months, compared to 10-15c/kg at the same time in the 2012-13 year,
McWilliam said.
He was also pleased for farmers that the 2013-14 season forecast was not cut as drastically as pessimistic observers had been picking in the past week.
Also helpful for dairy farmers was that the advance rate at a robust $5 for the new season would be the same as for the season just ending, he said.
Milk price volatility a planning factor
Fonterra’s opening 2014-15 season milk price forecast is a $1.40/kg drop in pay for dairy farmers but the good news is that $7 is slightly above the average milk price for the past six years, says DairyNZ.
Chief executive of the industry body, Tim Mackle, noted $7 was also the kick-off forecast for the 2013-14 season – which looks set to return a $8.40 milk price – which he said showed the kind of uncertainty farmers had to factor in to their financial planning.
Many farmers had had a “cracker” season, Mackle said.
Nationally, milk production was up 9.5% for the season to the end of April, compared to the same time last year.
Bay of Plenty farmers had been particularly fortunate with record production and a great payout, Mackle said.
Farmers were getting used to volatility having experienced it for the past decade.
In growing numbers they had adjusted their farm systems to ensure their businesses could respond to shifts in milk price.
Farmers with high debt, facing higher interest rates, and now the drop in milk price, would be feeling the most vulnerable, he said.
“Those kinds of farmers are often our industry’s new farm owners or new herd-owning sharemilkers. It can be tough on them.”
Mackle said average farm working expenses per kilogram of milksolids were between $4 and $4.20 for farmers on DairyBase, the industry’s benchmarking system.
The more the farmgate milk price dropped, the harder it got for some farmers to make an operating profit, with interest, rent, and living expenses on top of farm costs.
“The good news is that $7 is slightly above the average milk price they’ve had for the past six years.”
Related story: Milk price cut to $8.40 with $7 for next season
