Fonterra announced a lower opening milk price for farmers next season and also cut its forecast for this season as Chinese demand lags behind pre-pandemic levels.
The co-operative expects to pay farmers between $7.25 and $8.75 per kilogram of milk solids for the season starting next month. The $8 per kgMS mid-point, which farmers are paid off, lags behind the $8.20 per kgMS it expects to pay this season, which it reduced from its earlier forecast of $8.30 per kgMS.
Fonterra’s forecasts are lower than futures pricing on the SGX-NZX Dairy Derivatives market, which had priced in this season’s payment at $8.30 per kgMS and next season’s payment at $8.38 per kgMS.
“We still haven’t seen the re-emergence completely of where China was from pre-Covid levels, so that’s obviously put a little bit of softening in both the current season and the outlook,” Fonterra chief executive Miles Hurrell said in an interview.
Hurrell said he expects Chinese demand to start returning to normal towards the end of this calendar year.
Fonterra remained “very positive” about the Chinese market over the medium to long term due to its favourable demographics with a growing middle class and increased consumption of dairy products, he said.
In New Zealand, competition is heating up amongst processors as incumbents and new entrants vie for a milk supply pool that is expected to flatline or decline as environmental regulations are tightened following the industry’s rapid expansion over recent decades.
In the country’s largest dairy region, Waikato, Fonterra is facing stiff competition from existing rivals like Open Country Dairy which expanded its capacity and has been running radio campaigns offering a premium to Fonterra’s price to attract new farmer suppliers.
Competition has further intensified as new processors have emerged looking for farmer suppliers, with Singapore’s Olam Food Ingredients even trying to tap Fonterra chairperson and dairy farmer Peter McBride to supply its new milk processing plant in Tokoroa – he declined.
“Milk supply in New Zealand is red hot at the moment,” said HighGround Dairy global dairy consultant Stuart Davison.
“Everyone, everywhere could do with more milk. Milk supply in New Zealand is in hot demand. For the processors, the issue is securing supply but also amid conditions where milk supply in New Zealand is declining.”
Processing companies have massive amounts invested in their factories and need to secure milk supply to run them efficiently, he said.
“These big companies are playing pretty hard to secure supply,” Davison said.
As the country’s dominant dairy company, Fonterra’s milk price sets the benchmark for its rivals and also sets the tone for the future of the industry as farmers weigh up investment returns from dairying versus other options for their land.
“This forecast is actually a really big signal for Fonterra suppliers and every other dairy farmer in New Zealand to sit back and say is my business worth carrying on in this current situation or do I need to start making alternative investment decisions or system changes,” Davison said.
The new season’s forecast will be closely watched by farmers at a time when they are being stung by higher costs and declining incomes.
Fonterra’s forecast for the current season which ends this month has slipped from $9 per kgMS at the start of the season to $8.20 per kgMS which may not be enough to cover costs for some farmers.
“Costs have risen sharply and at the same time, the milk price has declined,” said Westpac senior agri economist Nathan Penny. “The jaws have closed on farm margins and therefore profits.”
Hurrell acknowledged the opening milk price could be tough for some farm breakeven points.
“If we look back over history, an $8 price is still a very, very healthy price. It’s just been eroded by some of those inflationary costs that we’ve seen on farm,” he said. “Things have been tough on farm, and costs have increased.”
Still, he noted there were some green shoots starting to come through with interest rates looking to have peaked, labour availability improving and prices for inputs such as fertiliser coming off their peak.
Hurrell said the co-operative recognised the pressure farmers were under and had designed a new advance rate guideline to get cash to farmers earlier in the season which would see it paying 75% of the opening price at the start of the season, up from 65%.
“We’re pleased to be able to use our balance sheet to support farmers in that way,” he said.
Westpac’s Penny said the increased competition for milk was positive for farmers.
“Competition for milk will generally lead to higher prices. That’s good for farmers in those places that have more choice in terms of who they supply.”
Competition was most fierce in Waikato, closely followed by the next largest dairy region of Canterbury, he said.
Fonterra’s farmgate milk price is governed by regulations. To increase its competitiveness, Fonterra has rejigged its capital structure, making it easier for farmers to supply the co-operative without having to tie up as much capital in shares.
“Milk has been flat in the last couple of years and we’re always open for good sustainable milk to come back to the co-operative and we have seen some great win backs from farmers that are willing to come back or wanting to come back to the co-operative, so that’s great to see,” Hurrell said.
The co-operative reported a higher profit in its third-quarter update, which enabled it to lift its full-year forecast for normalised earnings to 65 to 80 cents per share from 55 to 75cps and Hurrell said it remains on track for a strong full-year dividend.
Having sold its Chile business Soprole and its last remaining China farm, Fonterra is also bringing forward the payment date of its proposed $800 million capital return of around 50cps, from October to August.
Units in Fonterra’s NZX-listed fund jumped 5.5% to $3.65 in midday trading on Thursday, making them the second-biggest gainer on the market.
Source : Stuff New Zealand May 25th 2023