Farmers face ‘brutal’ time as Fonterra cuts price forecast

Source: Stuff

Federated Farmers have predicted the next six months will be “brutal” for dairy farmers as they cope with tight cash flows following Fonterra’s announcement of a cut in this season’s milk payout price to $4.40 per kilograms of milk solids.

Fonterra has announced an opening forecast farmgate milk price of $5.25 per kilogram of milk solids for the 2015-16 season, slightly higher than commentators were predicting.

This does not include the forecast earnings for the 2015-16 financial year.

However the co-operative at the same time reduced its forecast farmgate milk price for the 2014-15 season to $4.40 per kg/ms, down from its previously announced forecast dividend range of 20-30 cents per share.

The change amounts to a forecast cash payout of $4.60-$4.70 for the 2014-15 season that would be paid to a fully shared-up farmer.

Chairman John Wilson said the revised forecast reflected the reality that global commodity prices had not increased as expected.

Federated Farmers dairy chairman Andrew Hoggard said it was disappointing to see the drop in the 2014-15 return. Cash flows would be tight for the next six months at least, with the advance rate beginning at 70 per cent of the forecast farmgate milk price – an opening rate of $3.66 per kg/ms.

“It confirms what we already know, and that is that the next six months are going to be brutal,” Hoggard said.

The advance rates Fonterra pays are just $3.66 for June, July and August. It is not until January that the advance rate hits $4, but farmers will not receive that payment until February.

Hoggard said the message was the same to farmers as it had been for months.

“We all know there is volatility, now we’ve been rudely awoken to it. Farmers need to focus on the long term, and make sure they’ve got support,” he said

Rabobank economist Hayley Moynihan said the prices were “largely as expected”, reflecting the fact any recovery would not occur until later in the season. She said Rabobank was standing behind farmers.

Wilson said world markets were over-supplied with dairy commodities following good growing conditions in most dairy producing regions.

“This is a tough season and we will continue to keep our farmers informed as the season draws to a close given the current volatility,” said Mr Wilson.

The forecast farmgate milk price change for the current season will mean a further revision to the advance rate schedule of monthly payments to farmers.

Wilson said the forecast farmgate milk price for 2015-16 was based on Fonterra’s best view of long-term global dairy supply and demand.

“We can expect prices to recover going forward, and to see a rebalancing of supply and demand over the season. However it is more difficult this early in the season to determine exactly when this recovery will lead to a sustained price improvement,” said Wilson.

ASB economist Nathan Penny agreed with Hoggard that the Reserve Bank would cut the official cash rate in September and October. Penny is predicting it will be cut by a total of 50 basis points.

Fonterra chief executive Theo Spierings said the long-term fundamentals of global dairy demand were strong.

“Our forecast for the new season takes into account a range of factors including global milk production forecasts, the economic outlook of major dairy importers, current inventory levels and geopolitical events,” Spierings said.

“Given the season we are coming out of, we are absolutely focused on improving farmer returns and driving the co-operative’s performance,” he said.

Meanwhile the Greens have called on Landcorp to stop converting forests to dairy farms or risk doing serious damage to the rural economy.

“Landcorp needs to stop the dairy conversions until they can show how undertaking more conversions stacks up economically in the face of the lower forecast milk price. All the information that we’ve seen so far suggests that, in fact, dairy conversions may be hurting other farmers financially,” Green Party MP Catherine Delahunty said.

Landcorp is in the process of converting 25,700 hectares of forest to dairy farming in the upper Waikato River catchment area alone, at a cost of $87 million.