With a whiff of desperation, chief executive Theo Spierings said the milk price forecast included an expectation world powder prices would recover from US$2700 a tonne now to US$3500 in March.
He called it a reasonable expectation because the average of the past five years had been about $3500 and that level was about break-even for costs and returns in milk production worldwide.
But geo-political concerns in Ukraine and the Middle East and the ebola outbreak in West Africa weighed heavily on Fonterra’s forecasts, he said.
International grain prices have also fallen, encouraging milk production in the United States.
International milk powder prices have halved in the past seven months and dragged Fonterra’s milk price from $8.40/kg MS last season to $7, then $6, and now $5.30.
Commentators said $5.30 was still ambitious, given the level of international commodity prices and supply and demand uncertainties.
Fonterra has been forced to cut the advance payment 48c/kg to $4 from November.
It is the first time since 2008-09 such a reduction in the advance has been necessary and the price that season ended at $4.72.
It was the season commodity prices collapsed worldwide in the wake of the global financial crisis.
Fonterra chairman John Wilson said farmers were entitled to the most up-to-date forecast with a new level of disclosure, so they could make production and financial decisions.
“Dairy prices have always been volatile but what has changed is the magnitude of the shifts,” he said.
“Very little intervention occurs around the world so not a lot of product is stored and information flows very freely.
“Right now sentiment is driving volatility, but the medium-term fundamentals of demand and supply are very sound.”
Wilson called the revised advance of $4 a generous proportion of the $5.30 forecast.
Yet farmers might not be reassured by Spierings’ additional information, reasoning that a delay in recovery for world prices beyond March would drag the milk price down further, perhaps into the $4 range.
The European Union needed a home for 2.5 billion litres of milk processed into cheese and other products as a consequence of the Russian trade ban, Spierings said.
European member states had already put 100,000t of cheese into storage for 3-7 months.
Fonterra was on track for a 90 million litres a day peak milk flow late next month, about a 3.5% increase on last season’s peak.
Chief financial officer Lukas Paravicini said off-season expenditure of $50m had provided an additional 1.4m-1.5m litres a day of capacity, ahead of next season’s 10% boost to capacity after $500m of capital expenditure was announced recently.
The capacity tweaking includes reverse osmosis at Longburn and the newly acquired plant at Studholme, in South Canterbury.
Should 90m litres come through the gates any day soon Fonterra’s 24-hour processing would be “doable without interruptions”, Paravicini said.
Realignment of world prices meant all Fonterra’s plants would be usable, without the undue emphasis on milk powder that characterised last season.
Spierings said the focus would be moved back from quantity to quality.
“A lower forecast farmgate milk price reduces input costs in our consumer and foodservice businesses,” he said.
“In turn, we do expect to deliver increased returns as a result of a recovery in margins on our products.
“In addition, stream returns for non-reference commodity products such as cheese and casein are currently making a positive earnings contribution, but it is still very early in the financial year.
“With volatility in commodity prices, a wide range of outcomes are possible in relation to stream returns. The wider dividend range reflects this volatility and at this stage of the financial year it is not realistic to be able to accurately forecast the final result for the year within a narrower range.”
NZX Agrifax dairy analyst Susan Kilsby said her forecast was $5.10/kg MS, which included the futures market quotations for the next six months, reaching US$3000/t for whole milk powder next March.
“I am not saying that Fonterra can’t get to $3500 but that the indications are not there at present,” she said.
“But you always have to factor in some movements for the rest of the season.
“At the moment there is a greater likelihood that the payout will go lower.”
Farmers might not be dissuaded from chasing milk production using palm kernel and other feed supplements, she said.
“It still makes sense at $5.30/kg milk price.
“However, the $4 advance will hit hard in November and the cashflow implications post-Christmas are huge.”
