Farmers turn backs on abysmal season

Fonterra last week set its opening forecast for 2016/17 at $4.25 a kg of milk solids - below market expectations of around $4.50 per kg. Photo / Supplied

Hopes are running high that the first GlobalDairyTrade (GDT) auction for 2016/17 will show an improvement in dairy prices after farmers consign the poorest season in a decade to the scrap heap.

NZX futures have, over the last few sales, proven to be an inaccurate indicator of things to come, but market expectations are that prices this Thursday will be flat to slightly weaker.

"I'm hopeful that it will be another 2 or 3 per cent increase," said Federated Farmers Waikato president Chris Lewis.

"I think most farmers will be happy with a little increase every now and then, rather than a big rise followed by a big fall."

Fonterra last week set its opening forecast for 2016/17 at $4.25 a kg of milk solids - below market expectations of around $4.50 per kg.

The forecast rests on whole milk powder prices gradually improving on the last GDT traded price of US$2252 per tonne.

For 2015/16 the forecast remains at $3.90 a kg - well below DairyNZ's estimated break even point of $5.25 a kg.

While the latest forecast was lower than expectations, Fonterra farmers' cash flows were given a leg up by an increase in the rate of advance payments for the first half of the new season and by bringing forward payments for the current season. The moves were in addition to the co-operative's already-announced plan for the early payment of its final dividend in two instalments.

The New Zealand dollar, despite very low interest rates and constant attempts from the Reserve Bank to talk it down - has remained firm - which has played havoc with Fonterra's export returns. In previous dairy price slumps, the New Zealand dollar has fallen to around US50c to US55c.

Fonterra estimates that a drop in the exchange rate to those traditional lows would equate to a $1.50 per kg increase in the Fonterra payout.

Chairman John Wilson said the company holds to the view that the supply/demand imbalance that has plagued world markets over the last two years is nearing its end.

"Strong demand growth - that's 2 to 3 per cent - is continuing and, pleasingly, we are seeing that milk supply growth is starting to come off ... dramatically," Wilson said.

Fonterra's milk production for the current season is expected to fall by 3 per cent as farmers cut back stock numbers and reduce the amount of supplementary feed they bring on to the farm.

Today is so called "gypsy" day - the effective transaction date for dairy farm sales and sharemilking contracts, when farmers in search of greener pastures transfer their stock.

"I suspect the number of people shifting will be down because the number of farm sales is down," Federated Farmers' Lewis said.