28 May 2015

Price drop more pressure for indebted farmers

2:03 pm on 28 May 2015

Fonterra's announcement of a further drop in this season's milk price, and a subdued forecast for next season, could put some over-stretched dairy farmers further into debt.

Fonterra logo.

Photo: SUPPLIED

It has lowered its forecast milk payout for the current season by a further 10 cents per kilo of milk solids, bringing it down to $4.40 a kilo, with a dividend of 20 to 30 cents per share on top of that.

It has also announced an opening milk price for the new season, starting in June, of $5.25 a kilo, well below the current season's opening price of $7.

The latest drop in this season's payout forecast comes only a month after it reduced the price from $4.70 to $4.50, driven by the continuing decline in international dairy prices.

If the latest price adjustment turns out to be the final figure for the season, it means farmers supplying Fonterra will be getting not much more than half of what they got in the 2013-2014 season, when Fonterra paid a record $8.40 per kilo.

The co-operative will confirm the final price for the 2014-2015 season later this year.

Fonterra chair John Wilson said the revised forecast reflected the reality that global commodity prices had not increased as expected.

He said they had hit their lowest point since 2009 and supply continued to outweigh demand. That had been made worse by an unexpected late season surge in the milk flowing out of New Zealand, the world's biggest dairy exporter.

"So we saw in late January, and then in February, prices started to respond globally to news that it was starting to get quite dry across much of New Zealand and of course there were drought declarations in some of the country. But what we saw through late February and then in March were very good weather conditions across much of the country, and farmers have responded."

He said New Zealand milk supply was 8 percent up in April.

Mr Wilson said Fonterra was being cautious with its opening milk price forecast for the new season, starting next week.

"We are taking a very conservative view of what milk prices should do, because they are quite unsustainable right now, and that's increasingly becoming global, where milk prices have come back to reflect prices to farmers around the world.

"Profitably on farm, globally, is now coming down to a very low level, compared with where it has been over the last six to 18 months.

He said Fonterra believed prices should start to move up over the next six to 12 months.

"We're just not a 100 percent sure when that will be."

Federated Farmers' national dairy chair, Andrew Hoggard, who is also a Fonterra supplier in Manawatu, said the revised forecast payout for this season was a shock, but the opening forecast for next season is in line with most people's expectations.

He said the advance rates are going to mean a second successive season of extremely tight cash flows for farmers.

"With the advanced rate at about $3.60 and really those payments not getting over $4.00 till February next year where we'll be paid $4.17 for the milk produced in January, that's going to mean that it's going to be an extremely tight six months, or seven, even eight months really, cash flow wise for farmers."

Mr Hoggard said some farmers were already running at a loss this season and will have to take on extra short-term borrowing to get them through to the next year.

But he said there was some hope out there on the horizon in some markets.

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