5 Aug 2015

Farmers expect worst after price plunge

5:34 pm on 5 August 2015

Dairy farmers are expecting Fonterra to slash its milk price forecast when it reviews the payout on Friday.

Milk at Pak n Save Kilbirnie.

Photo: RNZ / Alexander Robertson

International dairy prices plunged overnight to their lowest in the seven-year history of the Global Dairy Trade (GDT) auction. Prices fell 9.3 percent in the latest fortnightly auction, the 10th fall this year.

The average price of the key commodity for New Zealand dairy farmers, whole milk powder, has fallen by just over half since March. That price, which affects Fonterra's forecast payout to its farmer shareholders, took a 10.3 percent dive in last night's auction to $US1590 per tonne.

Fonterra's milk price for the current season stands at $5.25 per kilogram of milk solids.

Federated Farmers' dairy chair Andrew Hoggard said if the co-operative revised its forecast in line with other companies it could come down by about $1 per kilo.

"If you look at the drops we've seen from Open Country and Westland, they've both dropped around that same range."

A fall of that scale drop would bring the total Fonterra payout - the milk price and dividend - to about $4.40.

Mr Hoggard said that was "nowhere near enough" to cover costs this year. He added that he has been hearing mixed messages about the level of support that dairy farmers are getting from their banks.

"We're hearing of banks being good and approachable, but we're also hearing the opposite. We do know that in the Waikato in particular, there's been a number of receiverships of sharemilkers, which is really concerning.

"Sharemilkers are probably the ones who are most in danger at these times and they're the future of the New Zealand dairy industry. These are the guys who in 20 years time will be buying the farms."

'We've been through this before'

The latest drop in dairy prices has also brought a call for Fonterra's farmer shareholders to declare a vote of no confidence in the co-operative's board and management, and for all its farmer directors to stand for re-election.

Fonterra sign

Photo: 123RF

Waikato University Professor of Agribusiness Jacqueline Rowarth - who is also a Fonterra supplier, as the co-owner of a Waikato dairy farm - said farmers were becoming increasingly angry about falling milk prices and Fonterra's response.

"Putting milk, a valued product, on the auction platform with no minimum price defies belief - and offering greater quantities of it - is just indicating that there's a lack of understanding about supply and demand issues.

"Now we've been through this before, with other products that we've treated as commodities, and the way out of it is to start looking at the added value that we do before the farm gate and Fonterra hasn't been able to do that. So it's time to rethink governance and management in terms of their strategy.

"And if we say there's a vote of no confidence, then the board has to restand and that would allow us to get enough people on there who are thinking about the milk products in a different way."

Fonterra chief executive Theo Spierings announces a large profit fall with chairman John Wilson, left, and chief financial officer Lukas Paravicini, right.

Fonterra CEO Theo Spierings with chairman John Wilson, left, and chief financial officer Lukas Paravicini, right Photo: RNZ / Kim Baker Wilson

Three of Fonterra's farmer directors, including its chairman John Wilson, will be up for re-election this year because their three-year terms are ending. That means three new board members could be elected, but Professor Rowarth said that was not enough.

"There are nine farmer shareholders and three other directors [on the board]. We actually need a big change."

Professor Rowarth said there also needed to be an independent review of Fonterra's books, to shed more light on which parts of its operation are or aren't making money.

Damien O'Connor.

Labour primary industry spokesperson Damien O'Connor Photo: RNZ / Jane Patterson

Labour primary industry spokesperson Damien O'Connor said Fonterra needed to consider suspending its trade on the GDT auctions.

"It's not working for them, it's not working for the dairy industry and there must be questions over who are the beneficiaries of a fortnightly trade that is simply driving the value of dairy into the ground.

"GDT is indicative of pricing, but not the final price for [other] contracts that Fonterra or the other companies negotiate. So they just have to go back to the traditional way of negotiating longer term contracts with people who depend upon the supply of the product.

"That might be a better way than trading through GDT, that's clearly undermining the value of the dairy industry."

Oversupply on world markets

A contributing factor to last night's price drop was the volume offered, which was 78 percent greater than at the previous auction.

AgriHQ analyst Susan Kilsby told Morning Report said Some prices were the lowest since 2002, and dairy companies would be revising down their payments to farmers.

Ms Kilsby said there was an oversupply of milk on the world market.

"A couple of years ago we saw incredibly high prices for dairy products which encouraged supply around the world.

"We've also seen the quotas come off in the EU which has allowed farmers there to produce essentially as much milk as they like."

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