Dairy prices: No quick recovery expected


Fonterra sees little prospect for global dairy prices recovering before the end of the year.

It has lowered its forecast milk price again, from $4.15 per kilogram of milk solids to $3.90.

Chairman John Wilson says: "This further reduction in the forecast farmgate milk price is the last thing farmers want to hear in what is proving to be a very challenging season".

The New Zealand dollar slipped after the announcement, from just over 68 US cents to around 67.80 US cents by 10:20 am.

The Fonterra Shareholders' Council says that the news is a "bitter pill to swallow".

Chairman Duncan Coull says: "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 current environment is no doubt placing added personal stress on farm so it’s imperative we keep in touch with our neighbours, friends and families, and all support each other where we can."

Westpac economists say the announcement "could see business confidence slide further in coming months".

Fonterra is also forecasting a dividend payment of between 45 and 55 cents per share. It will retain some of that money for future investment, but a fully shared up farmer can expect a total payout of between $4.25 and $4.30.

That is well below Dairy New Zealand's estimated break-even point for the average farmer of $5.25.

The situation is particularly challenging for share milkers and also for farmers carrying large levels of debt.

The Reserve Bank says dairy farm debt now stands at $37.9 billion, compared with $30 billion five years ago.

A Federated Farmers poll shows that 11.1 per cent of dairy farmers feel they are under pressure from their banks.

Global dairy prices have fallen due to too much supply and not enough demand.

Fonterra Chief Executive Theo Spierings says dairy exports and imports have been out of balance for 18 months.

European production has increased by more than Fonterra expected. Ireland, the Netherlands and Germany have all ramped up production significantly since European quotas were lifted in April 2015.

At the same time both China and Russia have cut back their purchasing of dairy products. So too have nations that are exposed to the low oil price, like Saudi Arabia and Venezuela.

Fonterra executives do not see a change in the supply / demand balance before the end of the year.

Mr Spierings says: "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".

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

"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."

Last year Fonterra provided interest-free loans to its shareholder farmers.

Fonterra has hinted that further help could be on its way, when it announces its financial results on March 23.

The co-operative 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".

Concern has been raised about Fonterra's debt levels. Its total debt has soared from $4.65 billion in 2011 to $7.56 billion.

Fonterra says its debt levels are within manageable levels and it has a "very sound business".

Fonterra Chairman John Wilson also told the teleconference that the board had total confidence in chief executive Theo Spierings.