The dairy futures market is pointing to a continued slump in prices on Tuesday night’s auction, with the lower Kiwi dollar not expected to offset falling world dairy prices because of Fonterra’s currency hedging.
On Friday the Fonterra board will give an updated milk price forecast for the 2015-2016 season, widely expected to involve a severe cut to its current $5.25kg milk solids forecast. The co-operative, which collects around 86 per cent of the country’s raw milk, is also expected to deliver earnings guidance for the rest of the financial year, with farmers expecting dividend advice. Directors are also likely to update the season’s milk production and provide more information on the company’s internal business review, which has already seen more than 530 job losses announced.
Federated Farmers dairy chairman Andrew Hoggard is hoping Fonterra will strike a milk price forecast somewhere between Open Country Dairy’s slashed new price guidance to its 700-or so suppliers of $3.65-$3.95, and Westland Milk Products’ downgraded forecast, announced last week, of $4.60 to $5. This is $1kg down on Westland’s forecast of three months ago.
Westland chief executive Rod Quin said the revised forecast not only reflected the dramatic fall in world prices this year but reports that US and European producers are offering milk powder at US$1600-$1650 tonne and signals of «real concern» that international prices could sink below US$1600 tonne. Some dairy futures contracts are in the US$1500 tonne range at present.
At the last disastrous Global Dairy Trade auction on July 15, in which the average price fell 10.7 per cent, the wholemilk powder price slumped 13.1 per cent to US$1848 and skim milk powder fell 10.1 per cent to US$1702. New Zealand’s dairy export staple is milk powders.
Hoggard said all eyes will be on Fonterra’s dividend guidance. He said farmers had been «fuming» when the company cut its dividend forecast range at its first half year financial results in March to 20c-30c a share, down from 25c-35c.
«What I hear from most from farmers is that by and large we can accept the milk price is a global phenomenon and we can live with that – though some people are upset by it and want something done, But the dividend is what we have been investing in for more than 10 years.
«We’ve been investing in all the talk there’s been about that (value added business) and people are starting to scratch their heads over that. They’re definitely grumpy.
«A lot of people had held out hope that we had invested for so long in this stuff because it was going to pay dividends in these sort of times and smooth the ride for us.»
Meanwhile, more predictions are emerging that land values will fall from this spring.
People who had bought dairy farms in recent years based on high milk prices «should be a bit worried», said Quotable Value, New Zealand’s largest valuation and property services company.
The company’s Rural Value division national manager David Paterson said ANZ economist Con Williams was «on the mark» with his prediction that prices could fall in spring and summer when most farms are traditionally sold.
«We are noticing a definite change in sentiment following the latest GDT auction and over the past few months we’ve witnessed a significant decline in the number of farm sales recorded,» said Paterson.
The Reserve Bank says dairy debt has trebled since 2003 to $34 billion. Much of that debt has been from borrowings for rising land prices.
Agricultural consultant Will Wilson said a decline in the value of land and farm buildings was one of the big impacts the dairy downturn would have on a farm’s balance sheet.
«With business yields impacted from reduced market returns and a poor performing dairy company (Fonterra) then demand for dairy farms will decline. The value of dairy farms will be negatively affected – land values will reduce in the dairy sector,» Bay of Plenty-based Wilson said.
The value of dairy stock had already declined, he said.
Fonterra had a responsibility to be «much more proactive and realistic» about the market and to keep its shareholders informed of the impact of the international price drop on its own business, which in turn directly affected farmer returns through the milk price and dividend paid, Wilson said.
He advised farmers to keep focused on their business.
«Try to keep the emphasis on all things inside your gate. Keep aware of the other issues such as Fonterra’s business performance and the real international market situation….but don’t dwell on those things – we can’t control those.
«We are in the long game as long as I have been in the agriculture industry there has never been any doubt in my mind it is the industry that has the best and greatest future for our country.»
Source: Stuff
