Fonterra farmers will be as much as $78,000 poorer this season than they expected following the latest drop in the farmgate milk price forecast.
Fonterra has cut its 2018-19 forecast farmgate milk price from $6.75 per kilogram of milksolids to a range of $6.25-$6.50.
Chief executive Miles Hurrell said milk supply was growing, and despite a rise in Chinese demand for whole milk powder, there was still a mis-match between supply and demand.
“I know how hard it is for farmers when the forecast farmgate milk price drops, but it’s important they have the most up to date picture so they can make the best decisions for their farming businesses.”
Just over a month ago the dairy giant dropped the forecast from $7 to $6.75.
At the lower price, farmers with the average milking herd size of 414 will be $78,000 less well off than they thought they would be, at $6.50 they will receive a $39,000 reduction in expected income.
Federated Farmers dairy group chairman Chris Lewis said the cut would have a direct impact on farmers and the wider community.
“Farmers will hold back from committing to upgrading infrastructure. This comes off the back of rocketing fuel prices as well.”
Lewis said it was not a good look for Fonterra.
“A good communications strategy is to get the bad news over in one hit, but this follows a cut only six weeks ago. The new CEO and chairman have got a lot of work to do,” Lewis said.
He pointed out that whole milk powder prices – on which the farmgate forecast is largely based – had not dropped significantly and the New Zealand dollar had dived which should have helped exports.
New Zealand milk volumes have risen by 1.3 per cent this season compared to last and Europe, United States and Argentine production was tracking ahead of last year.
ASB analyst Nathan Penny said the cut was not unexpected as Fonterra previous forecasts for this season had looked on the high side.
“The forecast range is now set at a more realistic level. Furthermore, the shift to using a range rather than a point estimate is an acknowledgement of the uncertainties to the outlook.”
The ASB was sticking to its $6.50/kg forecast, but said it continued to carry risk of being trimmed.
Hurrell described the range as a new move to provide the best possible signals.
“We operate in a hugely volatile global market place, so it is very difficult to pinpoint an exact forecast farmgate milk price this early in the season. For example, weather conditions can change suddenly and this can have a significant impact on the global milk supply.”:
“As a result, we have chosen to give a range of $6.25-$6.50 per kgMS and be clear that the advance rate is based on $6.25 per kgMS. The final price could be outside this range as we are still early in the season and up against considerable volatility. We therefore recommend farmers budget with ongoing caution,” Hurrell said in a statement.
The timing of today’s update was driven by available market information and was not requirement under the Dairy Industry Restructuring Act. Fonterra is required to give a forecast for DIRA purposes by December 18.