Landcorp disappointed Fonterra to end guaranteed price that underpinned 2015 earnings

Landcorp Farming says it is disappointed Fonterra Cooperative Group [NZX: FCG] is to stop offering a guaranteed milk price (GMP), which has helped New Zealand's largest corporate farmer manage price fluctuations and prevented an even bigger slump in 2015 earnings.

Fonterra said this week that it will make its last GMP offer in December, for milk production through to the end of the 2015/16 season. When the programme was piloted in the 2013/14, it was the only price risk management tool available for farmers but the board chose to halt the GMP after three seasons because some shareholding farmers thought it skewed the market, said chief financial officer Lukas Paravicini. He pointed to a new risk management tool NZX is preparing to roll out as a possible alternative.

"We're not surprised by the decision but we are somewhat disappointed," said Landcorp chief executive Steven Carden. "We thought that the GMP was a great tool for all farmers to manage price volatility in their businesses. A major part of our strategy is about minimising exposure to commodity price cycles, which we're doing with success with our wool and meat."

Landcorp's 2015 operating profit tumbled to $4.9 million from $30 million, mainly reflecting a sharp drop in the price of milk solids. It said the year "might have proved even more challenging" if the company hadn't secured a significant volume of supply to Fonterra under the guaranteed price.

Fonterra scaled back its GMP programme in June as farmers sought to shelter from volatile pricing by offering to supply 45.2 million kilograms of milk solids from 443 farms, exceeding the 40 million kgMS the company had made available under the guaranteed price. Farmers can apply for a further 20 million kgMS in December.

NZX hasn't made public its new risk management tool for the milk price, saying it plans to meet stakeholders to confirm contract details and a timeline for a launch. The tool would "allow market participants such as brokers and banks to assist farmers with the ability to hedge their milk price in advance," it said.

Federated Farmers dairy industry group executive Allan Baird said NZX may have to work to coax farmers to use its risk management tool, which is in addition to the dairy futures on offer through the exchange, because some are still leery from the interest rate swaps debacle, where banks offered derivative products to farmers to manage their interest rate exposure between 2005 and 2012. Three banks agreed to pay compensation of $24.2 million in settlements with the Commerce Commission and Financial Markets Authority, which said farmers were misled over the complex financial products.

"With interest rate swaps, there has probably been a little bit of fingers burnt," Baird said. But swings in the price of milk make farmers feel "overpaid one year and ripped off the next. From a planning perspective you don't know what to do with your surpluses."

Some farmers would "look to upskill themselves and there would be some appetite for risk management products," he said.

More farmers were also watching the dairy futures contracts that trade on the NZX dairy derivatives market for a sense of the direction of prices, given they had become a useful lead indicator of direction, if not always the magnitude of moves, Mr Baird said.

Pricing of the October futures contract for whole milk powder suggests a jump of 17% in the price of whole milk powder in next week's GlobalDairyTrade auction, which would mark the fourth straight gain at the GDT auctions.

(BusinessDesk)