Banking chief confident dairy prices will rebound

Lower milk payouts are so far not affecting dairy farm prices, say estate agents. Photo / Mark Mitchell

Downturn cyclical and most farmers will cope, says Rabobank's Ben Russell.

The next eight months will be lean for dairy farmers but Rabobank NZ chief Ben Russell says he is confident the downturn will be cyclical and one most farmers' finances can cope with.

Fonterra, in line with expectations, has forecast a $5.25 per kg milk price for 2015/16, and $4.40 per kg for the 2014/15 season that ended on Sunday.

"If they get to $5.25, that's two years in a row of prices being below the long-term average, and that obviously will create some financial stress for farmers," Russell told the Herald.

"Rabobank's view is that this is very much a short-term cyclical downturn and that over the course of this year and into 2016, we think supply and demand will come back into balance much more than it is at the moment, and that global prices will start to lift, with more price rises in 2016/17," the chief executive said.

Russell said farmers would be focused on getting through the two successive lean years and many would endure cash losses. There was no doubt those with high debt would be at risk, he said.

"But the vast majority of farmers have got very sound equity, strong balance sheets and have got the capacity to get through the next couple of years."

The state of the sector could rub off on to other forms of farming, particularly with more and more land being used for dairy support, and Russell said the downturn would have a significant impact on some of the regional economies.

Rabobank's rural lending book is worth just under $10 billion. The bank is New Zealand's third largest rural lender, after ANZ and BNZ, with 17 per cent of the market.

After home mortgages, rural lending is the second largest form of lending in New Zealand, and is a significant part of most of the major banks' balance sheets.

According to Rabobank analysis, dairy prices have been the most volatile of all the major soft commodities over the past five years.

"Farmers are getting used to extreme volatility," Russell said. "They don't like it and it is hard for them to deal with, but they are working their way through it."

For now, sharply lower payouts are not affecting a subject close to farmers' hearts -- land prices.

Farm prices have continued to rise, according to latest Real Estate Institute of New Zealand data.

PGG Wrightson Real Estate general manager Peter Newbold said prices had held steady and in some cases firmed, but the size of farms sold had been smaller.

He said the firmer farm prices were simply the result of there being more buyers than sellers. "Foreign buyers are present, but not as many as the general public would perceive."

Many of the foreign buyers were the same players who had been in the market over the past few years.

"At the moment, farm prices are not falling and the only way that is going to change would be if the supply [of farms] changed," he said.

Federated Farmers dairy chairman Andrew Hoggard said most farmers would feel the financial pain over the next eight months or so.

Long term, expectations were for an improvement.

Hoggard said foreign ownership of farmland was a hot issue among Federated Farmers' membership.

"Where people get worried is when they see a corporate buying up farmland and then buying up processing assets as well," he said.

Meanwhile, futures pricing suggests tomorrow's GlobalDairyTrade auction could see a mild rise in prices.

Further out, Fonterra's $5.25 farmgate milk price - which is predicated on wholemilk prices reaching US$3500 a tonne by the end of the season - is looking optimistic.

MG indicates IPO price between A$2.10 and A$3.20

Australian dairy co-operative Murray Goulburn (MG) said the indicative price range for its initial public offering had been set in a A$2.10 to A$3.20 range.

MG said the final price for the offer, which is aimed at raising A$500 million ($538 million), will be announced on July 3.

The offer opens June 9 and closes on June 24. Investors in the MG Unit Trust will be eligible to receive annual and half-yearly distributions which will be equivalent to dividends paid to MG's shareholders.

The existing 100 per cent farmer control will remain unchanged as unitholders will not have voting rights in respect of MG and will therefore not have control over its strategic and operational decisions.