Drop in payout looms

A likely global recession, triggered by Covid-19, will impact demand and could drop the payout by up to $2/kgMS compared to the current season.

Fonterra’s 2019-20 payout range is $7 to $7.60/kgMS; its 2020-21 opening forecast will be announced early June.

Rural bankers are predicting a wide-ranging opening forecast next season; Rabobank $5.60/kgMS, Westpac $6.30/kgMS and ASB $6.50/kgMS.

However, ASB senior rural economist Nathan Penny is warning farmers to plan for “a sub-$6” payout.

“For now, we retain our $6.50/kgMS forecast, but note the increasing downside risks and suggest that farmers start contingency planning for the possibility of a sub-$6.00/kg milk price for the 2020/21 season,” he says.

Rabobank senior dairy analyst Emma Higgins says its forecast is based on global supply and demand fundamentals and factors in significant market uncertainty.

 “Given the rapidly-changing operating environment due to Covid-19, the forecast settings are incredibly complicated and there are a number of upside and downside risks that could impact the bank’s views on the global dairy markets over the course of our forecast timeframe,” she says.

Outgoing Waikato Federated Farmers president Andrew McGiven agrees that there is lot of uncertainty about next season’s payout.

“Indications from the economists are to expect a pull back on milk price, but the great unknown is by how much,” he told Rural News.

“The ultimate effect on the world economies is still very hazy and with uncertainty comes volatility, however I think we should all expect that a lot of people’s disposable income will be severely eroded by what is happening and this will have some sort of flow-on effect.

“Although food is a necessity, if the number of retailers and hospitality outlets reduce, then the market and demand for dairy and other food staples will be less than projected supply in the short term and this could have an adverse effect on price.”

Fonterra farmers have enjoyed farmgate milk price of over $6 for the past four seasons, with this season’s price tipped to be peak at $7.30/kgMS.

However, in an email to farmers recently, Fonterra chairman John Monaghan alluded to European and US farmers pouring milk down the drain due to the impact of COVID-19 on their supply chains.

Monaghan noted that milk production was up in key regions: the US, Latin America, the UK and EU.

“This is likely to disrupt the global supply/demand balance that has supported solid milk prices in the 2019-20 season,” he warns.

Monaghan says when announcing its opening forecast next month, Fonterra “will be considering the high levels of uncertainty that we are seeing across the world, stronger supply signals from key dairy regions, and the NZ/US exchange rate as we forecast what prices could be more than a year from now”.