Fonterra rejects criticism of milk price guidance, while forecasting cautious $5.25/kgMS for new season

Thursday 28th May 2015

Fonterra Cooperative Group, the world’s largest dairy exporter, has rejected criticism of its performance in communicating milk price forecasts, saying it is being as transparent as possible.

The cooperative today announced a cautious opening farmgate milk price forecast for the new 2015/2016 season of $5.25 per kilogram of milk solids, at the upper end of commentators' expectations, while knocking a further 10 cents/kgMS off this season’s figure to $4.40/kgMS, the lowest level in eight years.

ANZ Bank New Zealand has suggested the dairy giant should move to publicly reporting its milk price guidance monthly but chief financial officer Lukas Paravicini said Fonterra already gives sufficient transparency, publishing a global monthly update on market conditions that feeds into the milk forecast and informing the market of any relevant information that could affect the price.

Open Country Dairy, the second largest milk processor, forecast its new season milk price at $4.75/kgMS to $4.95/kgMS last week. OCD supplier and Waikato Federated Farmers president Chris Lewis said its suppliers were fortunate that when information changed OCD was the first to communicate to suppliers, updating it monthly or weekly if necessary.

Fonterra said today that global dairy market conditions remain tough, with world markets over supplied after farmers globally increased production in response to strong prices paid 12-18 months ago. This supply imbalance has heightened due to continuing good growing conditions in most dairy producing regions, it said.

Paravicini said there remained a high degree of uncertainty about how quickly world prices would recover as supply and demand adjust.

“We do expect to see progress in the demand and supply over the next 12 months and for us it will be very telling what happens in the next 7 month period up to December,” he said.

The $5.25 forecast for the 2015/2016 season was based on GlobalDairyTrade auction figures for whole milk powder rising to US$3,400 a tonne by the end of next season in May 2016, up from the current US$2,400 a tonne, he said.

Along with its previously announced forecast dividend range of 20-30 cents per share, the change for this season makes a total forecast cash payout of $4.60-$4.70, compared to $8.50 just a year ago.

Federated Farmers dairy chairman Andrew Hoggard said the further 10 cent cut for this season will make it really tough for farmers managing their cash flows through the low winter months with the likelihood of little or no retro payments helping to smooth out that cash flow.

ANZ Bank economist Con Williams said there was a lot of uncertainty with structural shifts in the global dairy industry including the loss of the Russian market and growth in corporate farms in the US and China which were pumping out milk in those countries.

Westpac Banking Corp economist Michael Gordon said his current forecast was for the milk price to end the 2015/16 season at $5.70/kgMS, although continued softness in the GlobalDairyTrade auction results meant that the risks were to the downside. “The 2015/16 season is shaping up to be a distinctly below average one, following a very weak 2014/15 season,” he said.

The advance rate for the new season will begin at 70 percent of the forecast farmgate milk price, with an opening rate of $3.66/kgMS. Paravicini said the cooperative realised farmers would need help with their cash flow so had set the advance rate quite aggressively.

“But farmers also want us to be financially disciplined. We have to strike the right balance,” he said.

It’s unlikely to be enough to avoid the need to restructure some farm debt, especially for new entrants, said ANZ’s Williams, especially given the Reserve Bank had said 11 percent of farmers had loan to value ratios above 70 percent and negative cash flows from the 2014/2015 season.

Williams said it was a tricky balance for Fonterra because it didn’t want to pay out too much in advances to help farmers with their cash flow and then suffer liquidity problems itself.

“The $3.66/kgMS advance was in line with our thinking,” he said.

Hoggard said the advance rate wasn't scheduled to pick up to $4.17 until February 2016 for the milk produced in January which would "again, make the period through to next autumn really difficult."

He said the banks need to appreciate their interests are with a long-term view of the industry and that price volatility was "a fact of life, not an aberration. Everyone, and especially the banks, need to understand this and work with it," he said.

Westland Milk Products has said it will start the new season with a higher than usual advance payment of $4.40/kgMS which supplier Katie Milne said helped get the farmers' season off to a good start and with cash flow at a critical time. "Fonterra tends to do its pricing in the other direction," she said.

Paravicini said he expected milk production to reduce worldwide next year in response to demand and global dairy prices and as farmers cut spending on supplementary feed to save money. But the cooperative didn’t yet have an estimated figure on what its 10,500 milk suppliers are likely to achieve next season, he said. “Milk production follows market signals, particularly in Oceania where it is more pasture based but also in Europe. You only have to see how low spot prices are in Europe.”

Paravicini said he had no additional comment on yesterday’s announcement that Ralph Norris, an independent director since 2012, would step down from the board in November due to other commitments.

BusinessDesk.co.nz

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