Including a forecast dividend of 40-50c per share, the total payout forecast is $4.25-4.35.
Federated Farmer's Wayne Langford, ASB's Nathan Penny and Professor Jacqueline Rowarth discuss the latest milk price announcement on NBR Radio and on dema
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Fonterra [NZX: FCG] has slashed its forecast farmgate milk price payout to $3.85 per kg of milk solids for the 2015/16 season, down from the most recent forecast of $5.25.
Including a forecast dividend of 40-50c per share, the total payout forecast is $4.25- 4.35.
Chairman John Wilson said the reduction is due to the continued significant imbalance in the global dairy market between weak demand and surplus supply.
“This imbalance and the challenge of lower prices continuing for longer than anticipated is a global issue, which dairy farmers around the world are increasingly grappling with.
“Current prices are unsustainably low and we are seeing them beginning to impact production levels globally. We have confidence that prices will recover over the course of the season. However, it will be a tough season for our farmers.
“The range of possible scenarios is contributing to the uncertainty we are seeing today.
When will the market pick up?
“We know the global dairy market will improve. The hard thing to call at the moment is exactly when and how quickly,” Mr Wilson said.
The drop in the forecasted milk price may potentially wipe billions of dollars from the rural economy.
The fall was not unexpected, with most analysts this week picking a payout of below $4.00/kg.
The forecast price cut is the latest in a run of bad news for farmers. Dairy NZ estimates $5.70/kg is the industry average breakeven point for most farmers.
AgriHQ dairy analyst Susan Kilsby says few farmers will be able to turn a profit at such a low milk price.
Fonterra said it will help them out with an additional 50 cents per shared-up kilograms of milk solids, which it estimates will cost up to $430 million in the first half of the season.
Fonterra chief executive Theo Spierings said the key influences of forecast earnings are expected to be:
“As part of this work and given the current pressures facing our farmers, we have reviewed our capital expenditure for the next two years. As a result we are now targeting a spend of $500-600 million less for the 2016 financial year compared to the 2015 financial year.
“We will continue to update our farmers and the market on business performance and the delivery of expected gains from the transformation of the business as the year progresses,” Mr Spierings said.
Volume forecast down too
Meanwhile, Fonterra has reduced its New Zealand milk volume forecast for the 2015/16 season to 1589 million kgMS, 2% lower than the previous season.
Mr Wilson said the revision reflected the likely impact of farmers using more traditional practices to manage their farm businesses within the limits of a low payout forecast.
“We are already seeing our farmers reducing stocking rates and reducing supplementary feeding to lower on-farm costs. In New Zealand, we have the advantage of a largely pasture-based system, which will allow farmers to lower costs. Nevertheless, it will be a difficult season for farmers if current prices continue."
“We expect to continue seeing our farmers make these sorts of on-farm decisions – particularly in light of today’s announcements,” Mr Wilson said.
Some 46,527 tonnes of product was sold at the auction, up from 31,691 tonnes at the last auction.
Fonterra under fire
Fonterra has come under fire for its response to the lower commodity prices, including its decision to put more product on a platform on which prices are going down, with no set minimum.
Waikato University agribusiness professor Jacqueline Rowarth told NBR yesterday Fonterra’s farmer shareholders would be right to call for a vote of no confidence in the co-operative’s board.
She says many shareholders are discontented, which is demonstrated by the independent dairy companies having no trouble attracting Fonterra suppliers.
“I would say this is a clear indication of no confidence,” she says.
It would seem NBR poll participants have not got a lot of confidence in the co-operative’s board.
Asked if Fonterra shareholders should call for a vote of no confidence in the co-operative’s board, 74% say yes, with the remaining 26% in disagreement.
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