Fonterra shaves 50c off forecast milk price
Fonterra has dropped its forecast milk price mid-point by 50c as a surge in global milk production is putting downward pressure on commodity prices.
A dividend of 20-25 cents per share helps to soften things for a fully shared up farmer.
"The revision has turned our season from being 'lite' to 'super trim,' says Andrew Hoggard, Federated Farmers Dairy chair.
"While the size of the drop is a surprise the revision wasn't, given GlobalDairyTrade's slide over much of the current season. Several weeks ago we agreed with the banks it could be in the $6 to 6.25/kgMS range but we thought it would have been a less severe haircut.
"It means farmers will need to watch costs closely and cut their cloth accordingly. It means getting back on the computer to reforecast farm budgets. One thing for sure, the margin between operating costs and revenue has appreciably closed up.
"We recommend farmers talk to their bank manager, farm consultant and accountant. These days we can't burn the chequebook, but some may be deleting their online banking apps.
"Given half of what we get paid is spent locally, this will impact the towns but the cities are not immune.
"It is not all doom and gloom as we are confident the payout will progressively lift as the season unfolds. Rabobank expects the first half we're currently in will remain flat, but some price recovery should kick in towards the end of this year and into 2015.
"I think you will find we are in a season of two-halves. The first half isn't flash but after half time and the market equivalent of a few oranges, we'll be back on form.
"This is not the death of dairying and nor is it anything to do with food scares either. It simply reflects a near perfect production season in Australasia, North America and Europe. It is classic supply and demand set against a world which is barely producing enough milk.
"There is also some good news coming from the beef side of dairying. Beef and veal values are up by 5.8% in the nine months to June. That's off the back of good demand coming from Asia and highlights how diversified we increasingly are.
"If farmers are revising payouts to cut their cloth then political parties heading into the election ought to be revising polices the same," Hoggard says.
Fonterra's forecast milk price payout for the last (2013/14) season is $8.40 kg/MS.
