Fonterra's guaranteed milk price offer oversubscribed as farmers shelter from volatile pricing

Thursday 25th June 2015

Fonterra Cooperative Group had twice as many farms offer to supply milk for a guaranteed price for the upcoming season than last season amid uncertainty about when global milk prices will recover.

A total of 45.2 million kilograms of milk solids was offered by 443 farms, exceeding the 40 million kgMS available under the guaranteed price, the Auckland based milk processor said in a statement. That's up from 180 farms in June last year offering to sell 26 million kgMS.

Fonterra set its June guaranteed milk price (GMP) at $5.25/kgMS, in line with its opening farmgate milk price forecast for the 2015/16 season and at the top end of its initial range of $4.85/kgMS to $5.25/kgMS.

Fonterra, the world's largest dairy exporter, started offering a guaranteed milk price in 2013 as a way to give farmers more certainty on what they'd get paid for a portion of their milk supply, given volatility in global market pricing. The scheme also provides Fonterra with increased certainty over a portion of its milk input cost, which allows it to lock in longer term supply contracts with key customers at set prices. The average winning price on the benchmark GlobalDairyTrade auction last week dropped to the lowest level since August 2009 and Rabobank said this week the market may not recover until the first half of next year as it absorbs increased supply.

More farmers are being drawn to guaranteed prices, joining the likes of Landcorp Farming which said last week that it wouldn't need to cut its full year earnings guidance in the face of falling dairy prices because New Zealand's largest corporate farmer had "locked in under the guaranteed milk price a fairly significant percentage of our overall milk."

"More of our farmers are seeing GMP as a financial risk management tool and are choosing to lock in a price for a percentage of their milk production," Fonterra’s group director cooperative affairs Miles Hurrell said. "We received a good range of applications from small to large farms from throughout New Zealand, who will now be able to use this income certainty to help to better budget and plan for this season.”

Because the June offer was oversubscribed, applications were accepted from the lowest price upwards, with applications at $5.25/kgMS scaled back by 16.5 percent, the company said.

Dairy farmers will be able to apply for a further 20 million kgMS under a guaranteed milk price in December.

BusinessDesk.co.nz

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