Experts believe Fonterra’s milk price forecast is likely to be on the conservative side.
Fonterra’s new season forecast due this week tipped to be below break-even point.
It’s crunch time for dairy farmers this week when Fonterra releases its farmgate milk price forecast for the coming 2015/16 season.
Analysts estimate the forecast will be close to $5 per kg of milksolids. The $4.50 a kg forecast for the current season, which ends on May 31, could be reduced because of low GlobalDairyTrade prices, but analysts said the chances of that were slim.
The advance payment for 2015/16 is expected to come in at about $3.50 a kg, down from around $4.50 this time last year.
Two poor seasons in a row are likely to create cashflow problems for many farmers, given the break-even point for most has been estimated by DairyNZ at $5.40 a kg.
At the last GlobalDairyTrade auction, prices fell to their lowest level since August 2009.
The Reserve Bank, in its latest financial stability report, cited low dairy prices as one of three key risks to New Zealand’s financial stability if they were to persist.
The big question facing the sector is whether the current low-price environment is an aberration or something more permanent.
Discussion in the industry centred on whether low prices were the result of structural changes to the cost curve globally, the loss of Russia as a dairy export destination, the impact of low oil prices on demand, extra milk powder capacity coming on stream in Europe or the impact large-scale corporate dairy units overseas were having on production, said ANZ rural economist Con Williams.
“If you put them all into the mix, you could make quite an argument for lower long-term prices, but I don’t know the answer to that,” Williams said.
Fonterra’s announcement, which is due after tomorrow’s board meeting – probably the next day – was likely to be on the conservative side, analysts said.
ANZ expects a farmgate milk price for the new season of about $5 to $5.25 a kg.
This assumed an average effective currency in the mid US70c range, a mild recovery in international dairy prices, and a slightly lower cost base from reduced lactose costs, it said.
“In reality we don’t believe there will be a good read on what the season has in store until around the start of the fourth quarter,” ANZ said.
ASB Bank rural economist Nathan Penny expects a $5.70 a kg farmgate milk price for the coming season, but believes Fonterra is likely to err on the conservative side with a forecast “in the vicinity” of $5.
“Fonterra is traditionally more conservative on the basis that it does not like to run the risk of overpaying farmers and having to claw back any payments or advances,” Penny said. “They tend to start low and work up.”
Penny expected Fonterra to paint a picture of improving prices over the course of the season. There were signs that milk supply was starting to tighten in response to lower prices, he said.
“Supply is slowing but it’s not slowing quickly enough to bring about a material lift in prices.”
So far, farms have managed, thanks to good cashflow from the previous season spilling over into the current season.
Penny said farmers had been working closely with their banks to manage their working capital and that, for now, banks had been accommodating but that the next few months would be critical for many.
“I think that in six months’ time [if] we are still looking at a $5 milk price instead of $5.50, then there will be some farmers under severe pressure.”
Fonterra farm gate milk price
•Season ahead expectation: close to $5/kg of milksolids.
•Fonterra’s current season forecast: $4.50/kg.
•DairyNZ break-even estimate: $5.40/kg
Source: NZ Herald
