Selling the iconic ice cream business Tip Top won’t end Fonterra’s financial woes, says broker Grant Williamson, of Hamilton Hindin Greene.
He says volatility will linger through next season but notes that forecasters are picking the milk price to come back.
Farmers are used to commodity price fluctuations and dealing with droughts, snowstorms, floods and earthquakes, Guy says.
Last month Fonterra lowered its 2014-15 milk price from $4.70/kgMS to $4.50/kgMS; with an estimated dividend range of 20-30 cents per share, this amounts to a forecast cash payout of $4.70 - $4.80 for the current season.
Guy says the drop in Fonterra’s forecast came a bit sooner than expected for some farmers. Now they will be eagerly awaiting Fonterra’s opening forecast for the new season on May 27.
Guy told guests at the opening of LIC’s new herd testing facility in Hamilton that he was confident farmers will get through this season in reasonable shape.
Last year’s record payout $8.40/kgMS has flowed into this calendar year; the focus will be on the next season.
“Let’s not forget last season our record payout of $8.40 was achieved against a very high US dollar; the average last year was US83c and this first five months average this year is around US75c,” he says.
The record payout last year was achieved against very strong headwinds and a challenging exchange rate, he adds.
Guy also put out some average payout figures. The average milk price for last the 15 years is $5.25/kgMS; after Fonterra’s formation in 2002 the average payout for the first five years was $4.20.
“So our farmers are resilient and they are used to commodity price fluctuations and used to dealing with droughts, snowstorms and earthquakes.”
Guy, who owns a dairy farm in Horowhenua, advised farmers to watch their costs.
“2015 will continue to be a challenging year, so they should focus and work closely with their banks and accountants and do line by line cash flow analysis to ensure they can get through the forecast period.
“Indications are next season will have some volatility but the outlook will be better than the current season; there’s a possibility of a $5.50, possibly $6 opening forecast.”
Last week’s Global Dairy Trade (GDT) auction saw the price index down 3.5%, its fifth successive decline.
Guy says one only has to look at the recent GDT results to get an idea of the volatility.
He says it’s very unusual to have the four big global milk producing regions – North America, South America, Australasia and Europe – awash with milk.
“Everyone right now has more milk and for those areas to have all that happening at once is very unusual.”
The Russian ban has also seen products displaced; milk used to make butter and cheese for Russia by European processors are being turned into milk powders and sent to our traditional markets.
China is also buying less milk products as a result of building a high inventory; Guy says the inventory is reducing and China will be buying again “very soon”.
He also pointed out that long term outlook for dairy products looked promising. Asia’s growing middle classes want more dairy products and New Zealand is well positioned to supply them.