Fonterra slashes forecast milk price payout as European milk floods markets

See also: Fonterra hints more farmer loans on the way

Fonterra [NZX: FCG] has cut its forecast farmgate milk price to $3.90kg/MS this season, down from $4.15.

The forecast is now just 5c above Fonterra’s forecast in August last year.

Chairman John Wilson says difficult conditions in the globally traded dairy market have put further pressure on the forecast.

Prices at the GlobalDairyTrade (GDT) have dropped at every auction so far this year bar one, (last week when prices rose by 1.4%).  

But AgriHQ dairy analyst Susan Kilsby says last week’s increase was more likely a flash in the pan than a bounce.

Mr Wilson says this further reduction is the last thing farmers want to hear in what is proving to be a challenging season.

“At times like this, the business needs to do everything it can to drive every last cent back to farmers,” he says.

“Management is fully focused on reducing cost and generating cash right across the business. The continuing lift in financial performance and our balance sheet strength will provide opportunities to support our farmers’ cash flows. We will provide an update on this at our interim results on March 23,” Mr Wilson says.

In late January, the dairy giant slashed its payout to farmers by 45c from $4.60 to $4.15.

Fonterra chief executive Theo Spierings says dairy exports and imports had been imbalanced for the past 18 months due to European production increasing more than expected, and lower imports into China and Russia – the two largest importers of dairy.

"The timeframe for a rebalancing has moved out and largely depends on production reducing – particularly in Europe – in response to these unsustainably low global dairy prices," Mr Spierings said. "Our forecast is based on no significant changes to either supply or demand globally before the end of the year. However, a reduction in the supply available before then could mean prices recover earlier than currently expected."

NBR reported earlier this month the government stance on encouraging companies, such as Fonterra, not to export to Russia has not changed despite the low dairy price.

“The long-term fundamentals for dairy are positive, with demand increasing at over 2% a year due to the growing world population, increasing middle classes in Asia, urbanisation and favourable demographics,” Mr Spierings says.

“Our forecast is based on no significant changes to either supply or demand globally before the end of the year. However, a reduction in the supply available for export before then could mean prices recover earlier than currently expected,” Mr Spierings says.

The cooperative is expecting New Zealand milk production to be at least 4% lower than last season, as New Zealand responds to the ongoing lower prices.

Source: GlobalDairyTrade.info (Click to zoom)

Fonterra Shareholders’ Council chairman Duncan Coull says the further 25% drop in Fonterra's forecast payout is a  bitter pill for Farmers to swallow.

“Farmers understand what the market realities are and continue to make adjustments where they can, but today’s announcement, coming so close on the heels of January’s 45 cent milk price reduction, will magnify the effects on our Farmers’ businesses.

“This news is difficult for us to hear and for our Co-op to give however, that it was provided in a timely manner at least lets us know exactly where we are placed and enables us to prepare accordingly."

Mr Coull says farmers want to see the full benefits that the co-operative model offers.

"We will all be watching March’s interim results with great interest."

Farmer support needed
Mr Coull says the current environment will be placing added personal stress on farm so it’s imperative dairy farmers keep in touch with neighbours, friends and families.

“I also ask that farmers stay connected with their co-op and contact their local Shareholders’ Councillor if they have any questions, need advice, direction or support.”

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