Fonterra offers guaranteed milk price for new season despite last season's undersubscription

Fonterra Cooperative Group [NZX: FCG] has opened applications for its farmer suppliers to lock in a guaranteed milk price for a portion of their milk in the coming 2015/2016 season in a price range of $4.85 a kilogram of milk solids to $5.25/kgMS, despite undersubscription for the last two offers.

The upper limit matches the farmgate milk price forecast for the new season which Fonterra released last week. There will be two opportunities to secure a GMP on 60 million kgMS for the season, with up to 40 million kgMS available in June and a further 20 million kgMS in December.

The way the GMP scheme works, farmers apply to supply some of their estimated milk production across one of a range of five prices. Allocations are made based on the lowest price offered first but all farmers will receive the same guaranteed milk price, which is determined at the highest price at which the total quantity of milk solids in the range is reached.

Fonterra originally pitched the GMP scheme as a two-year pilot in 2013 as a way of giving some farmers more certainty on what they'd get paid for a small portion of their milk supply early in the season, given volatility in milk prices. It also provides the cooperative certainty over a slice of its milk costs which is useful when negotiating with end customers.

Fonterra's head of origination Arron Atkinson said the process allows for prioritising allocation if the GMP is oversubscribed.

"All accepted applications will receive the same guaranteed milk price. However, it's important to note that depending on the total milk solids offered at each price, some farmers may not get all or any of the volume they offered," he said in a statement.

Farmers are limited in June to applying to fix between 10-75% of their estimated milk production for the coming season.

The scheme is no longer regarded as a pilot but the cooperative will assess each year whether to offer a GMP.

The launch of this year's applications follow the latest GlobalDairyTrade auction overnight where the index fell by 4.3%, with the average sale price dropping unexpectedly to $US2412 a tonne.

However, the AgriHQ season farmgate milk price for the 2015/2016 season increased 3c to $5.63/kgMS due to the drop in the value of the New Zealand dollar offsetting the weak auction results.

There has been a mixed reaction from Fonterra's 10,500 suppliers to the GMP scheme, with some viewing it as a risk management tool and others arguing the cooperative should maintain one milk price for all.

The original 15 million kgMS offered in the 2013/2014 season at $7/kgMS was oversubscribed and farmers had their allocations scaled back, which worked in their favour when the final milk payout ended up at $8.40. There is a break fee for reverting from GMP to the normal milk price system during the season.

In the following 2014/2015 season the 40 million kgMS on offer at $7/kgMS was undersubscribed, with farmers taking only 26 million. The payout forecast has since dropped to $4.40/kgMS, the lowest level in eight years. A further 20 million was offered in December at the then forecast price but it was also undersubscribed with only 14.5 million being allocated at $4.70/kgMS.

Fonterra Shareholders' Council chairman Ian Brown has said the GMP should stay as only a small proportion of the overall payout or it would send the wrong signals to farmers and allow inefficiencies to creep in.

The scheme is supported by banks, which have said they may encourage some heavily indebted farmers to opt for GMP but won't force them into doing so.

The Reserve Bank said last month that the distribution of the $32 billion in dairy sector debt is heavily skewed to a small number of highly indebted farms with about half the debt held by just 10% of dairy farms.

(BusinessDesk)