Speaking at Fieldays at Mystery Creek, Margrain said he did not see any compelling reason for prices to move upwards and quickly.
«That doesn’t mean we don’t think they are going to recover, because we do, but at this point in the supply demand matrix, it’s quite hard to see why there would be a sharp recovery in a short space of time.»
Margrain said a $4.50-$5/kg milk solids price was not a long term average for the industry and he expected to see a recovery. Recently OCD announced an opening forecast for the 2015-16 season of $4.75-$4.95/kg MS.
About 50 per cent of rural debt is held by 30 per cent of farmers and 30 per cent of debt was held by 10 per cent, according to ANZ, Margrain said.
That suggested a lot of farmers could break even at a $5 or less payout.
«That’s the trick and when we talk to our farmers we want them to be able to make sure they can ‘wash their face’ (break even) and not lose undue equity in a couple of tough years.»
On the international front, Margrain said there was «no appetite» in Europe to move on finding a resolution to the ban Russia placed on exports moving into the country. The ban was in response to sanctions placed on the country as a result of the Russian conflict in the Ukraine.
The recent lifting of the European Union’s milk quotas meant more milk would be produced on the world market.
«But every prognosis we see is for demand growth to exceed supply growth over the next 10 years.»
This would be fuelled by the growth of the middle class in countries in Asia that demanded protein.
Margrain said he was happy with OCD’s performance despite the tough season. He said the company had no plans for building any further plants in the immediate future and there was no intention to take on extra debt.
«We’re performing well and our payout is more than competitive, our cashflow’s been good, our company’s in good shape.»
Margrain said they had taken on new suppliers for the new season with the new numbers coming from Taranaki, Manawatu and Southland. Their supply base in the Waikato was at full capacity.
«We have filled all of our stainless steel. We can’t take any more supply but we have plans to to take further supply.»
He disagreed with reports a price recovery could take longer. Up until last season for the previous four years it averaged $7/kg MS.
«You have to think $6-$6.50 is more like a longer term average than $7.»
Fonterra chief executive Theo Spierings also disagreed.
«At this point of time, the price levels of where we’re at, in the Northern Hemisphere, it’s not economically viable to produce milk so supply will go down in the Northern Hemisphere.»
He said dairy product demand was still sluggish within Fonterra’s key export regions.
«But if you look at the key demographics within those key export regions, it’s all speaking for us.»
He said he was more cautious on a recovery after observing how sluggish demand had been in the past six months.
Spierings said the $5.25/kg MS forecast was based on a $3500 milk powder price in April and May of next year.
«That’s not optimistic, it’s not pessimistic, it’s the middle ground and that’s $5.25.»
His message to farmers that were frustrated with the co-operative’s performance was to look at Fonterra’s track record over the past 24 months.
«We have done the right thing over the past two years, we have grown 22 per cent [and] we’re operating in the right markets. We’re no longer in beautiful sunny weather, we’re in a storm, I’m accountable, we’ll lead it and we’ll get the result.»