Friday, March 29, 2024

Prices ‘have hit bottom’

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Fonterra will review its milk price forecast down in early December though it has been selling products for prices higher than those achieved on the GlobalDairyTrade auctions, company sources say.
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And it had not been forced to hold stock because of slow sales, those at the co-operative’s annual meeting in Palmerston North on Wednesday were told.

Fonterra was obliged to set a new milk price prediction if the Milk Price Manual calculation varied more than 30c/kg from the forecast price, now $5.30/kg milksolids, set in September.

But it hadn’t moved yet, despite commentators saying it should have, indicating it was selling products at prices higher than the GDT results suggested.

Independent modellers believed Fonterra’s $5.30/kg milksolids forecast was increasingly unsustainable because dairy commodity price recovery had been delayed and some competitors had already revised downwards.

Fonterra must make a new forecast in December under the Dairy Industry Restructuring Act provisions.

There will be a movement at that time, Fonterra sources have said.

And they would not rule out an announcement sooner, especially if prices fall again at the GlobalDairyTrade (GDT) auction on November 18-19.

Chairman John Wilson and chief executive Theo Spierings also provided some reassurance that international prices had bottomed out after a nine-month fall from record levels.

Global prices right now were not sustainable, being below the cost of milk production so global output was slowing.

“Demand is growing in line with predictions,” Wilson said. 

“Oversupply after good weather, low grain prices and risks heightened by geopolitical uncertainty have delayed the rebalancing of supply and demand.”

NZ milk production was running 3% ahead of last year but growth was likely to slow over summer, regardless of weather conditions, because of reduced supplementary feeding and early cow culling for cashflow reasons, he said.

Spierings said his sales force had sold the tonnages of products removed from the GDT auction channel over the past six weeks for higher prices to emerging markets.

Along with the stabilisation which had occurred in the past two GDT auctions, there were signals of recovery happening.

He denied a suggestion from a questioner that Fonterra’s inventory levels were rising quickly and said sales were keeping up with production, at about the halfway point of the season.

Another sceptical questioner wanted to know if the $5.30/kg MS forecast was realistic or was Fonterra sitting on another 30c adjustment.

Spierings said Fonterra turned 70% of its milk into powders and there was no more unused powder processing capacity around the world.

“We know that China is a very important market for powder and that we have a free trade agreement.

“But we are cautious about the situation in the Middle East and West Africa.

“Europe and the United States are going into their winters.

“Those signals and the outlook for the milk pools give us the forecast of $5.30.”

Wilson said that when formed, Fonterra produced 600,000 tonnes of milk powder annually and in 2013-14 it produced 1.2m tonnes and had 48% share of globally traded milk powder.

Another questioner wanted season-by-season milk price smoothing looked at, in the interests of farmers, the co-operative and the country.

Wilson said NZ produced milk along a pasture curve and that as much volatility occurred within a season as between seasons, therefore monthly payments to farmers were appropriate.

He did not want Fonterra to hold on to farmers’ money but pass it on and let farmers manage their own cashflows.

“When it comes to sending the best signals we can to farmers, we haven’t seen any better suggestions than what we have at the moment.”

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