Global commodity markets are slow to recover. The goalposts keep shifting and farmers will have to weather the storm for longer.
This week’s GlobalDairyTrade auction is on the watchlist for forecasters. The four consecutive price index increases from the end of August gave some hope of reaching reasonable price levels by the end of the year – US$3000/tonnes for whole milk powder from Fonterra’s perspective – but a decline at the previous two auctions has caused a revision in those forecasts.
The Reserve Bank has expressed concern about the growing risk that the dairy sector’s debt levels present to the nation’s financial stability. It has requested the sector’s five biggest lenders to stress-test their portfolios. If dairy prices remain low or dairy farm prices fall significantly this could exacerbate the already substantial financial pressure on some farmers.
This morning Fonterra raised its forecast share range by 5c. With an assumption the payout will reach its forecast $4.60/kg milksolids (MS) the total forecast cash payout for this season would be $4.95-$5.00/kg MS. The industry breakeven point for most NZ dairy farmers is recognised at $5.30/kg MS.
The improvement in Fonterra’s performance is a welcome message to struggling farmers and is crucial to a recovery in this country’s dairy sector.
Margins across the group for the first-quarter have jumped to 23% compared to 14% a year earlier and the V3 strategy – velocity, volume and value-add – is kicking off.
Fonterra is still expecting a drop in milk collection of 5% for the season. October has been a good month weather-wise and some farmers are reporting production volumes closer to last year’s for the same month.
With commodity markets now expected to recover by mid-2016 it is reasonable to expect the forecast payout to stay fairly close to where it is for this season. But if the following season shows signs of a good payout, it is a certainty NZ dairy farmers will have their ducks lined-up to take advantage and claw back lost ground from the previous two seasons.
