Fonterra farmers face income drop

New Zealand dairy farmers face tens of thousands of dollars being wiped from their income this year after Fonterra announced it had cut its 2017-18 farmgate milk price (FMP).

The co-operative is slashing its FMP from $6.75 to $6.40 per kilogram of milksolids, meaning an "average" dairy farmer will lose about $50,000 of income.

At $6.40kg/MS, the reduced forecast payout is still well above the current industry-estimated break-even price of $5kg/MS, not to mention the 2015-16 season’s dismal $3.90kg/MS payout.

The ASB remained more positive yesterday, holding its forecast at $6.50kg/MS.

Fonterra chairman John Wilson said the lower forecast price reflected a prudent approach to ongoing volatility in the global dairy market.

The GlobalDairyTrade price for whole milk powder was a big influence  on the FMP and it had fallen by nearly 10% since August 1.

The result of the arbitration with Danone had affected the earnings guidance for the season but it had no influence on the FMP, he said.

"What is driving this forecast is despite demand for dairy remaining strong, particularly in China, other parts of Asia and Latin America, we are seeing strong production out of Europe and continued high levels of EU intervention stockpiles of skim milk powder."

The downward pressure on global prices was being partly offset by the lower New Zealand-United States dollar exchange rate, Mr Wilson said.

Fonterra’s strong financial position, customer order book at this point of the year, and confidence in demand meant the board was able to increase the payments made in January by 10c kg/MS. The advance rate would be held through to the payments in May.

Fonterra farmers would receive equal or higher payments for their milk over the period than they were scheduled under the previous $6.75 milk price, he said.

Fonterra reduced its milk collection forecast by 1% to 1525 million kg/MS — the same volume as last year.

ASB senior rural economist Nathan Penny noted a "hint of conservatism" in Fonterra’s updated forecast.

While it  had erred on the side of caution with its FMP forecast, it had been more confident with its payment schedule to farmers.

"All up, we are comfortable with our more optimistic view given the balance of factors. In particular, dry New Zealand weather has potential to put upward pressure on dairy prices."

Fonterra had reduced its 2017-18 production forecast to flat, from a 1% lift previously, he said.

Global demand was firm and the global butter shortage  ongoing. The main counter-weighting factor operating was robust EU production.

Chief executive Theo Spierings updated the market on Fonterra’s first-quarter results. Revenue of $4billion was up 4% on the previous corresponding period. Sales volumes were down 20% to 3.9 billion liquid milk equivalents and the gross margin of 16.7% was also down. The first-quarter financial results were generally as expected as the co-operative started the year with record low inventory followed by the second year of low spring milk collections from New Zealand due to wet weather, he said.

"This has challenged our ingredients business when we had lower volumes to sell."

The lower gross margin was in line with the second half of last year. However, when it was compared with the same period last year, it was down from 12.1% to 8.1%, a fall of 33%, mainly due to the rise in commodity prices. The consumer and food service business continued with strong sales in its key markets across both Greater China and Asia, reporting just a 3% fall to 1.3 billion liquid milk equivalents in total volume compared with the record levels at the same time last year, Mr Spierings said.

Gross margin in the consumer and food service business fell from 31% in the pcp to 24%.

However, Mr Spierings remained positive. The co-operative expected performance to be weighted to the second half of the year and remained confident of its full-year forecasts following revisions after the recent Danone announcements.

Fonterra was last week ordered to pay Danone $183million in recall costs.

"We are focused on continued tight operational and financial discipline and a key eye on our customers’ needs to maximise sales opportunities."


At a glance

Fonterra lowers farmgate milk price forecast to $6.40kg/MS

• Thousands of dollars wiped from farmer incomes

• Financial update shows revenue up and margins falling

• Co-operative remains confident it can meet financial forecasts

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