Revised forecast for farm milk price ‘scary’

Dairy farmers could end up owing Fonterra money under its ‘‘scary’’ lower forecast farmgate milk price, agricultural economist Peter Fraser says.

Fonterra has set an opening range for the 2020/21 farmgate milk price forecast of $5.40 and $6.90 per kilogram of milk solids, due largely to the increased uncertainly facing the sector over the next 15 months.

The co-operative yesterday reported a profit of $815 million before tax in the nine months to April 30, up $301m on the same period last year.

‘‘The fact that the top end is only $6.90 with a huge downside is scary, Fraser said.

‘‘The Reserve Bank reckons about 25 per cent of farmers need $6.20 just to break even given debt levels,’’ Fraser said.

There was a risk that the milk price wouldn’t rise over the season, but end up lower. Farmers could end up owing Fonterra. ‘‘That would be horrific,’’ he said.

Fonterra chairman John Monaghan said food service businesses that had closed due to coronavirus had driven down demand, as well as great supply from the European Union and United States, which had just been through peak season.

‘‘That milk is flowing into export markets and increasing competition for sales. As a result, prices are softening across the board,’’ he said.

The imbalance had impacted the global dairy trade prices (GDT). The GDT for whole milk powder was down 17 per cent since late January, Monaghan said. ‘‘Looking out to next season, a global recession will continue to reduce consumers’ purchasing power,’’ he said.

Government support programmes in Europe and the United States could have an impact on curbing milk supply, but Fonterra expects its competitors to put milk into longerlife products, which determined Fonterra’s milk price.

‘‘This forecast is based on the information that’s available now. We will regularly update our farmers on changes or events that may impact our milk price as the season progresses,’’ Monaghan said.

Waikato dairy farmer Andrew Mcgiven said the broad range provided for next season’s milk price forecast would be hard to budget with, which was not ideal given ongoing uncertainly around the demand in a post-covid-19 economy. ‘‘I’m just hopeful that for next season the payout does have a six in front of it rather than a five,’’ he said.

Southland Federated Farmers dairy chairman Hadleigh Germann said the broad range for next season’s forecast was not unexpected. Farmers would need to be conservative in their budgeting as a result because it would be ‘‘pretty hard to read the tea leaves’’.

Germann said the profit was reflective of the fact that Fonterra had been working in a challenging economic environment. ‘‘My initial reaction is that they are doing well. So, pretty pleasing. And they’ve maintained that there are earnings per share of 15 cents to 25c. How much of that we see as a dividend we’re not quite sure yet,’’ he said.

The current season’s farmgate milk price had also been narrowed to between $7.10 and $7.30 per kilogram of milk solids, with a mid-point of $7.20 in response to a drop in demand relative to the supply, pushing down prices, chairman John Monaghan said.

This would see the cooperative contribute about $11 billion to the New Zealand economy through the milk price for the year. The previous range was $7.00 to $7.60.

Mcgiven said he was disappointed but not surprised at the change to the season’s milk price range. ‘‘I was hoping it might have been closer to $7.30 or $7.40. And I was hoping they’d have a stronger end result for the final payout ... but it is what it is,’’ he said.

By July 31 each year the cooperative has paid 85 per cent of the milk price forecast to suppliers. After the annual results are announced in September,

a wash-up is done based on the actual results.

Fraser said the slightly lower milk price for this season was ‘‘still respectable’’ at $7.20. And the third quarter results were good, especially the massive reduction in debt, which Fonterra reported was down $1.7 billion to $5.7b. Less debt was ‘‘critical’’ now, he said.

Fonterra chief executive Miles Hurrell said work done to strengthen the balance sheet over the last year had paid off, allowing it to respond quickly to the challenges posed by the coronavirus crisis.

The co-operative was drawing on its global supply chain, diverse product and customer base to minimise disruptions, he said.

‘‘Covid-19 has affected virtually every country, market and industry, and as a result, the global dairy market is volatile and the outlook is uncertain. This is a tough environment for everyone ... We are drawing on all our experience in managing market volatility.’’