What Would Synlait Be Worth to Fonterra or a2 Milk?
Speculation of a possible joint move by Fonterra and a2 Milk to buy Synlait raises a much bigger strategic question, says agribusiness expert Dr Nic Lees.
Major banks predict a drop between 4% and 8% – much higher than Fonterra’s current forecast of a 2-3% fall.
Rabobank is picking a fall of 8%, ASB forecasts 5% and BNZ picks 4%.
ASB rural economist Nathan Penny says the market has been focused on Fonterra’s reduction in volumes on the GDT but will soon turn its focus on production and this is looking particularly weak.
“We’ve now factored in a 5% fall in production. Historically, that [would be] the largest fall since 1999… On that basis we would expect prices to continue to rise,” Penny says.
Aggressive cow culling by farmers is evidence “both in numbers and what we are hearing around the traps”. “If you look at cow slaughter, the data is running well ahead of last year. With US beef exports we are going to breach the quota for the first time since 2004, I believe, and that is largely down to the dairy cow cull.
“Farmers are likely to cull more once they get through calving and peak milk production so they are continuing to think along the lines of reducing their herd size.”
And spring has been poor, particularly down south, he says.
“In Southland they are struggling with temperatures and grass growth. The other factor is farmers using supplementary feed sparingly. So adding those things up, they are all effectively bowing to production being pretty weak. El Nino is another risk that hasn’t been factored in.”
Rabobank’s Emma Higgins says supply could fall more – maybe up to 8% -- as farmers cull, cut back the use of supplementary feed and take other measures to reduce costs. “It is a very big decrease: possibly with El Nino factored in as well, NZ production could drop significantly.”
Meanwhile, everyone will be watching the weather later in the season. BNZ has forecast A 4% production drop for this season, but the El Nino risk and its potential effect on production is a wild card, says economist Doug Steel.
“It is not only the weather risk on that, we know we’ve had a high cow cull; in fact we’ve exported some as well,” he says. “And obviously the economics are not flash: prices are still very low even if they do lift to $5/kgMS, cashflows are extremely tight onfarm and that doesn’t encourage production -- we’ve got -4% pencilled on the board.
“But all eyes are on the weather particularly in the second half of the season.”
ASB’s Nathan Penny says a number of production risks have not yet been factored in by the markets, including El Nino.
“That gives us the belief that production will be weak with the possibility of it being even weaker,” he says.
“We don’t see many risks going the other way at the moment. So if that happens, prices will kick on, as markets haven’t yet factored in production being that weak.
“Sentiment and Fonterra’s reduced volumes are the two things the markets have been looking at; they are thinking production but I don’t think they have quite grasped how weak it could be. They are factoring in Fonterra’s forecast of 2-3% weaker but not yet realising it could be 5% or more.”
