Fonterra suppliers have been dealt a blow with the co-operative revising its 2018-19 forecast farm-gate milk price from $6.75 to a range of $6.25-$6.50.Chief executive Miles Hurrell cited the stronger global milk supply relative to demand for the revision, which was not unexpected.
Rough estimates from economists suggested the revision would lower farm incomes by $380million to $760million.
Fonterra cautioned it was early in the season and there was potential for considerable volatility ahead. Caution was required when setting farm budgets.
In a statement, Mr Hurrell acknowledged it was hard for farmers when the forecast milk price dropped but said it was important they had the most up-to-date picture so they could make the best decisions for their farming business.
One farmer on social media said $33,000 of forecast income had been wiped from his budget since Fonterra’s opening forecast to the latest review, and he had only a small farm.
However, it was good the co-operative was communicating forecast changes sooner than DIRA required, he said.
Mr Hurrell said there was still strong production from Europe, the United States and Argentina. While hot weather in Europe had slowed the region’s production growth, it was still tracking ahead of last year. US milk production was up slightly and Argentina’s was up 6.8%.
In New Zealand, the season had got off to a positive start, mainly thanks to good weather and early calving in the South Island.
As a result, Fonterra had increased its forecast milk collections for the year to 1.550billion kg ms, up 1.3% from 1.525billion kg ms.
At recent GlobalDairyTrade events, prices for all products that make up the milk price had fallen.
Demand for whole milk powder, in particular, continued to grow in China and remained strong across South East Asia, but was simply not matching present levels of supply, Mr Hurrell said.
Providing a range for the forecast milk price, which was a new move, was part of the co-operative’s intention to provide the best possible signals, he said.
”We operate in a hugely volatile global market place, so it is very difficult to pinpoint an exact forecast farm-gate 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.”
Given Fonterra intended to make advance payments to farmers on the basis of a $6.25 milk price, rather than the mid-point of the range provided, Westpac senior economist Anne Boniface said that might suggest the co-operative saw the risks to its forecast skewed to the down side.
ASB economists said Fonterra’s previous forecasts had looked ”on the high side” and a downward revision was anticipated.
The forecast range was now set at a more realistic level. The shift to using a range rather than a point estimate was an acknowledgement of the uncertainties to the outlook.
In the short term, the bank expected more downward pressure on dairy prices. New Zealand was at its seasonal peak in production in October and, in line with that, peak auction volumes were also at their highest level for the year.
Source: Otago Daily Times