Farmers expect Fonterra to react to a global price fall by squeezing the new season payout forecast.
Farmers expect Fonterra to react to a global price fall by squeezing the new season payout forecast.
Pressure on Fonterra to perform on milk price and shareholder returns has taken on new urgency as its farmers gird themselves for a payout forecast cut announcement after a “shocker” of a global market price fall.
Whole milk powder (WMP) prices, which have a big bearing on thefarmgate milk price Fonterra pays its 9000-or so farmers, were down 8 per cent to an average US$2864 a tonne ($4688) at the Tuesday overnight Global Dairy Trade (GDT) auction.
One dairy market analyst said the decline was “a shocker”, taking WMP prices back to those not seen since June 2020.
“It wasn’t the news farmers wanted to wake up to and it’s certainly been noted in feedback we’ve received [since] from concerned farmers,” John Stevenson, chair of farmer watchdog, the Fonterra Co-operative Council, told the Herald.
“It’s a continuation of a declining trend. Alongside Fonterra, we’ve been looking for demand from China for whole milk powder to increase,” Stevenson said.
“Fonterra has been telling us since the end of last year they expected demand to strengthen... clearly the demand isn’t where Fonterra and farmers would like it to be.
“As a council, we can’t speculate on decisions Fonterra may or may not make in regard to their forecasts but pretty clearly, historically there’s a strong link between GDT and where the [farmgate] milk price sits.”
Dairy farmers, like other primary sector producers, have been struggling with soaring on-farm costs, higher interest rates, extreme weather events and the market impacts of the global economic downturn.
Also, Fonterra this year implemented a new capital structure. While its farmer-owners overwhelmingly voted in the share restructure, it resulted in a dive in Fonterra’s share and unit prices, which has cranked up the pressure for Fonterra to perform on dividend returns.
“The business performance in regard to ownership of shares will be really important for our farmers this year in light of where the milk price currently sits, or if it is below the cost of production,” Stevenson said.
Farmers would be expecting Fonterra to take the same measures they were in these challenging times - revisit budgets and closely review operating costs, he said.
John Stevenson, chairman, Fonterra Co-operative Council.
“Farmers will be focusing on what they have to spend, not what they want to spend. We’ve been through this before, having to look really closely at what we spend... but it doesn’t leave much fat in the system for investment, innovation and efficiency improvements.”
The last payout announcement from Fonterra, the world’s sixth-biggest dairy company and New Zealand’s largest business, was in May when it declared an opening 2023-2024 season forecast farmgate milk price of $7.25 to $8.75/kg milksolids, with a midpoint of $8.00/kg.
This forecast was in “expectation that China’s demand for whole milk powder will lift over the medium-term”.
The 2023-2024 season began in June.
Stevenson said dairy analyst reports put the current cost of production break-even point for the average dairy farmer at $8.50-$9/kg. If Fonterra makes a payout forecast announcement soon, as is widely expected, it will concern the 2023-2024 forecast.
Fonterra had not responded to a request for comment or timing of any announcement by publication time.
Farmers won’t know the final milk payout for the just-ended 2022-2023 season until September, but Fonterra has already “narrowed” that forecast payment, in May citing reduced “short-term” demand, particularly from China.
In May the company said GDT prices had not recovered to hold the previous $8.30/kg midpoint forecast for the 2022-2023 season.
It changed the forecast range for 2022-2023 from $8-$8.60/kg to $8.10-$8.30 and reduced the mid-point to $8.20/kg.
As the holder of around 78 per cent of the New Zealand raw milk market, Fonterra’s farmgate milk price becomes the benchmark for the $22 billion dairy industry.
Timely for Fonterra’s farmers, especially if the company cuts the forecast, is the imminent return of capital to shareholders, totalling around $800m.
Stevenson said the latest guidance from Fonterra was that the repayment would be at the end of August. How much each farmer-shareholder received would depend on how many shares they owned.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.
