Fonterra likely to lift farmer milk payments next season, analysts say

Wednesday 18th May 2016

Fonterra Cooperative Group is expected to lift its farmgate milk price payout to farmers next season, although it's likely to mark the third year of prices below the level required by most farmers to break even.

New Zealand's dominant milk processor is scheduled to hold a board meeting on Tuesday and Wednesday of next week, and may release its opening milk price forecast for the 2016/17 season early Thursday morning. Analysts in a BusinessDesk survey expect a payout of at least $4.43 per kilogram of milk solids for next season, up from a $3.90/kgMS forecast payout for the 2015/16 season, and from $4.40/kgMS in 2014/15. DairyNZ estimates the average farmer required $5.25/kgMS to cover costs this season and hasn't yet finalised a break even price for next season.

Dairy products are New Zealand's largest commodity export and a global oversupply and weak demand has dented prices, which has led to an increase in dairy farm debt and much angst about the future outlook for the industry. While New Zealand accounts for only about 3 percent of the world's dairy production, its small domestic market means local farmers are more exposed to volatility in global milk prices, with the country accounting for about 30 percent of the milk traded around the world.

"Clearly much can happen in the more than 12 months before the 2016/17 payout is finalised," Westpac Banking Corp senior economist Anne Boniface said in a note. "However, at this point, our view remains that a sustained improvement in dairy prices will be a story for 2017. We expect the pace of growth in global milk supply to slow in response to low international prices, but this is likely to be gradual. This year, prices are likely to continue to stumble around near current levels."

Estimates for Fonterra's payout for the upcoming season range between $4.43/kgMS and $6/kgMS, with three of the forecasts around $4.60/kgMS, according to a BusinessDesk survey of six agricultural economists and dairy market analysts.

ASB Bank rural economist Nathan Penny is the most optimistic, saying he expects Fonterra to set an opening forecast of $4.80/kgMS, "aiming towards the higher end of the prevailing market view in order to support farm cash flows". Penny expects the payout will lift to $6/kgMS by the end of the season as European farmers follow their counterparts in New Zealand and Australia and reduce supply.

Fonterra noted in its Global Dairy Update this week that European Union milk production increased 4 percent in the 12 months through February, and US production was up 1 percent in the 12 months through March. Meanwhile, New Zealand production fell 1 percent in the 12 months through March, and Australian production in the 12 months to February was in line with the previous year, although it was slowing as pasture growth deteriorated due to dry conditions.

The price for whole milk powder, New Zealand's key product, rose 3 percent to US$2,252 a tonne at the GlobalDairyTrade auction overnight, although remains below the long-term average price of US$3,050 a tonne.

"With dairy incomes set to remain under intense pressure for a third consecutive season, dairy debt is rising strongly" as farmers look to bridge the gap between revenue and expenditure, said Westpac's Boniface.

"The longer dairy prices remain low, the more pressure on the sector is building. Increasing debt will only fill the gap temporarily. Ultimately debt will need to be repaid, and in the meantime, higher debt levels leave the sector more vulnerable to negative surprises."

BusinessDesk.co.nz

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