Farmers lap up milk prices

Fonterra’s opening forecast for 2018/19 at a bumper $7.00kg good news as industry tackles cow disease

Farmers faced with the uncertainty of the disease Mycoplasma bovis at least have high milk prices to look forward to after Fonterra issued one of the strongest opening farmgate milk price forecasts yet.

The co-operative today upgraded its forecast for the current season to $6.75/kg of milksolids from $6.55, and pitched its opening forecast for 2018/19 at $7.00/kg.

The flipside for shareholders and owners of Fonterra’s NZX-listed units is that high milk prices are Fonterra’s greatest input cost. The high milk price prompted a cut in Fonterra’s earnings forecast to 25c-30c a share and its dividend to 15c-20c, which in turn prompted a 39c (6.8 per cent) fall in the unit price to $5.35.

But for farmers, the milk price is paramount, and yesterday’s revised price for the current season represents the third in a row where the price has been more than $6.00/kg.

That means most farmers will be comfortably in the black after the near debilitating slump of 2015 and 2016, which saw a rapid escalation of farm debt.

Chairman John Wilson said the milk price forecast for 2018/19 would be welcome news for the cooperative’s farmers.

“What we are seeing is a continued positive global supply and demand picture which gives us the confidence to increase our current forecast farmgate milk price into the new season,” he said.

But in a conference call, he said volatility in milk prices had once again made life difficult. “The challenge with that is we are getting this ongoing volatility in our earnings, which of course causes much frustration for our unit holders and our shareholders, so we have therefore lowered our earnings forecast [to] 25-30c a share [and] our dividend to 15 to 20c a share,” Wilson said.

However, the total forecast cash payout for farmers increased to $6.90 to $6.95 per kg — the third highest payout this decade.

Chief executive Theo Spierings said the earnings challenge that came with the higher milk price was compounded by the timing.

“There is always a natural lag in being able to pass through an increase in our input costs. But this increase has been both rapid and late in the year, making it difficult for these higher costs to flow through into our sales for this financial year,” he said.

In its third quarter business update, Fonterra said its revenue of $14.8b for the first nine months of 2017/18, was up 7 per cent on the same period last year.

But economists were circumspect about the prospects for the coming season.

“There is more uncertainty about the outlook for the 2018/19 milk price this early in the season, and we would treat it with more caution,” said Westpac senior economist Anne Boniface. “However, a third consecutive season where most dairy farmers [are] in positive cash flow territory should come as good news for New Zealand’s agriculture sector.”

ASB Bank rural economist Nathan Penny said Fonterra’s milk price upgrades were more bullish than expected.

“For now though, this bullishness is being tempered by Mycoplasma bovis concerns. As a result, farmers are unlikely to act on the strong milk price outlook and their spending and investment plans are likely to subdued until Mycoplasma bovis concerns recede,” Penny said.

Federated Farmers dairy chairman Chris Lewis said it was important that opening milk price forecasts erred on the conservative side because they can always be increased.

“It’s a hard conversation to take it down, so hopefully they have got their numbers right and that it will stand the test of time.”

The Ministry for Primary Industries is expected to announce next week if it will attempt to eradicate Mycoplasma bovis or to move to some form of management over the long term.