UPDATE: Fonterra holds steady on forecast milk price

UPDATE: Fonterra holding steady on forecast milk price no surprise to market and farmers

(Adds comment from economists and farmers throughout)

By Fiona Rotherham

Dec. 10 (BusinessDesk) - Fonterra Cooperative Group’s decision to hold steady its forecast farmgate milk price in the hope global dairy prices will lift in the first half of next year came as no surprise to market players.

Fonterra maintained its 2015/16 forecast farmgate milk price at $4.60 per kilogram of milk solids in an announcement today, which would mean a total cash payout, when the dividend is added in, of $4.95-$5.00/kgMS.

ANZ Bank New Zealand rural economist Con Williams said it was important farmers, who remain under serious cashflow constraints, don’t lose sight in their budgeting that the payout remains under pressure and that global prices need to lift in the first quarter of next year to achieve it.

Prices for whole milk powder, the most traded commodity, lifted 5.3 percent to US$2,260 metric tonnes in the latest GlobalDairyTrade auction on Dec.1, reversing recent declines, but the price needs to hit around US$3,000/MT to achieve the current forecast payout.

Federated Farmers dairy industry chairman Andrew Hoggard said he was “still feeling jittery” that the payout was likely to reduce with a fair chunk of the 2015/16 season still to go and most economic commentators predicting a level below Fonterra’s current forecast.

ANZ is forecasting a payout of between $4.25 to $4.50/kgMS.

Hoggard said he had read reports out of Europe that milk prices could stay subdued until 2020. At the World Dairy summit, payouts around the world were compared and it was obvious that New Zealand farmers were the quickest to reflect global dairy prices whereas there was quite a time lag in the US which has a huge domestic market and government support, he said.

Fonterra chairman John Wilson said the board and management had looked out over the next nine months and based the stable forecast on the view that current, unsustainably low prices will continue to impact production levels globally. While there were signs of a recovery on the demand side, particularly in China, that imbalance between supply and demand still needed to correct, he said.

New Zealand milk volumes are expected to fall by at least 6 percent over the current season and Fonterra Shareholders’ Council chair Duncan Coull said all eyes were now on what impact on production the El Nino weather patterns would have over summer.

“El Nino is already having an impact on the East Coast, especially the South Island, whereas where we farm in the King Country El Nino could bring a mixed bag,” he said. “There are three things farmers can’t control – the exchange rate, the milk price, and the weather.”

ANZ's Williams said if New Zealand production falls further over summer it could be the catalyst for an uptick in global dairy prices early next year though it would be better to see that happen from a lift in demand. It could also come too late to affect this season’s payout, he said.

“The main focal point is Europe. We’re going into this season with supplies of milk flowing from Europe not matching the competitive prices being seen in the international marketplace,” Williams said.

Meanwhile, ASB is predicting production will eventually slow out of the US and Europe and prices will gradually head higher from the first half of next year.

ASB rural economist Nathan Penny said today’s announcement from Fonterra contained good and bad news for farmers, with the cooperative ending its support loan of 50 cents per sharebacked kgMS from the end of this month.

Fonterra's Wilson said the loan, interest-free for two years, was made when the forecast milk price was $3.85/kgMS and had since improved. “We will provide $390 million in support to around 75 percent of our farmers through the most productive half of the season, including the peak,” he said.

The Shareholders' Council's Coull said the $800 million or so cost of continuing the support loan for the rest of the season would have put too much pressure on the company, given it’s trying to reduce its high debt levels by the end of this financial year.

Fonterra has said it will assess the need to continue the support if market conditions change later in the season and Hoggard said he’d like to see it reinstated if the payout price retrenches from the current $4.60 level.

Ratings agency Fitch said in a report yesterday that the cooperative support loan and higher than normal advance payments were the two key reasons behind its two notch ratings downgrade of the cooperative in October.

The Fonterra Shareholders' Fund, which gives holders rights to Fonterra's dividends, last traded at $5.73 apiece, and has shed 4.3 percent so far this year.

(BusinessDesk)

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