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Current as of 21/10/16 07:39PM NZST
Jamie Gray is a business reporter for the NZ Herald

Farmers urged to 'hang in there'

Fonterra's forecast for the current season is a milk price of $4.25 a kg of milksolids. Photo / Jason Oxenham
Fonterra's forecast for the current season is a milk price of $4.25 a kg of milksolids. Photo / Jason Oxenham

"Hang in there" - that's the message Fonterra chairman John Wilson was giving to farmers at Fieldays as they prepare for what looks likely to be the third consecutive season of tough financial times resulting from very low milk prices.

Fonterra's forecast for the current season is a milk price of $4.25 a kg of milksolids, up from $3.90/kg over 2015/6 but down slightly from $4.40 a kg in the season before that. For most, the record $8.40/kg milk price paid for 2013/4 is now looking like a distant memory. Ministry for Primary Industries data shows $4.5 billion in export revenue has been wiped from the dairy sector since June 2014.

Current prices are well below Dairy NZ's break-even point of $5.25 a kg but Wilson said he expected them to return to their long-run average of around $6 to $6.50/kg within six to 12 months.

Fonterra's view is that the current supply imbalance that is currently undermining dairy prices will start to come right within six to 12 months.

"Prices will come right," Wilson told the Herald at Fieldays. "The co-operative is in great shape. We are driving more product into the market and we are creating more value for their milk."

Low milk prices mean low input prices for the manufacturing, and dividend-paying, side of Fonterra.

"The irony is that Fonterra - the business - by any measure has never performed better than it has done today - and you would expect that - but in two to three years' time it should be better and better again," he said. "There is still a lot of uncertainty globally but my sense of it is that there is still that understanding and recognition that the business itself is operating well and that we are doing what we can to get money into farmers' hands while global dairy prices remain low."

This week's GlobalDairyTrade auction showed that dairy product prices were steady, but with the stark exception of whole milk powder, which dropped by 4.5 per cent to US$2118 a tonne. A recovery to US$3000 a tonne would see farmers and their bankers start to breathe easier, and the next few auctions are expected to prove pivotal in determining how milk prices pan out in the season ahead.

Farmers have been trimming expenses by reducing stock numbers, cutting back on feed supplements and reducing off-farm grazing. The talk at Fieldays was all about ways of improving efficiency without compromising production.

Australian farmers have seen milk prices come back sharply this year, meaning they too are producing milk at below the cost of production. In the European Union producers - the main source for the current world over-production - there are signs that supply is starting to turn lower.

"We are seeing other dairy farmers around the world are now faced with the challenges that New Zealand farmers have faced in the latest 18 months," Wilson said. "They have got to adapt as well."

ANZ rural economist Con Williams said at Fieldays that there was a realisation that there was no "get out of jail free card" for farmers facing sub-par milk prices but that they were rapidly adjusting to the new circumstances.

"They have become more resolute and stoic about trying to address the current situation, and that's really about focusing on what they can control."

- NZ Herald

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