Fonterra has slashed its milk price forecast to well below what most economists were expecting.
The co-op said it had cut its 2023/24 season forecast farmgate milk price range to $6.25 - $7.75 per kg of milksolids, with a midpoint of $7.00 per kg.
Most economists’ forecasts were around the $7.50/kg mark.
Fonterra’s previous forecast had a mid-point of $8.00/kg, which is around break-even for many farmers.
Prices for most of New Zealand’s commodities have been weak due to soft demand from China, the country’s biggest export destination.
Fonterra chief executive Miles Hurrell said the revised forecast range reflected ongoing reduced import demand for whole milk powder from China.
”When we announced our opening 2023/24 season forecast farmgate milk price in May, we noted it reflected an expectation that China’s import demand for whole milk powder would lift over the medium-term,” he said.
“Since then, overall Global Dairy Trade (GDT) whole milk powder prices have fallen by 12 per cent, and China’s share of whole milk powder volumes on Global Dairy Trade events has tracked below average levels,” he said.
“This reflects a current surplus of fresh milk in China, resulting in elevated levels of local production of whole milk powder, and reducing near-term whole milk powder import requirements,” Hurrell said.
However, he added the medium to long-term outlook for dairy, in particular New Zealand dairy, looked positive with milk production from key exporting regions flat compared to last year.
Some Fonterra farmers are asking how they are going to fund their operations after a shock $1 per kg drop in their payout forecast range, says Fonterra Cooperative Council chair John Stevenson.
The head of the Fonterra farmer watchdog said a forecast reduction was not unexpected given the global market downturn, but the size of the downgrade was “significant and will cause a lot of pain”.
His phone had been ringing hot since Fonterra’s announcement this morning with some farmers wondering aloud how they were going to continue to operate, he said.
The council could only hope banks would work with farmers on the sharp earnings change forecast for this 2023-2024 season.
The council would be closely questioning Fonterra on the drivers of the reduction.
Today’s move follows a string of poor GDT auctions.
At the last sale this week prices fell sharply.
The GDT price index for the twice-monthly auction dropped 4.3 per cent - its biggest fall since April.
Whole milk powder prices - which have a big bearing on Fonterra’s farmgate milk price - were down 8 per cent to an average US$2864 a tonne.
Buttermilk powder bucked the overall trend, with prices rallying 9.9 per cent to US$2207 a tonne.
Skim milk powder - another important reference product for Fonterra - dropped in price by 1.4 per cent to US$2454 a tonne, butter by 0.7 per cent to US$4680/tonne, anhydrous milk fat by 0.5 per cent to US$4705/tonne and cheddar by 1.4 per cent to US$3910 a tonne.
Dairy is New Zealand’s biggest export and China is the country’s biggest customer.
Fonterra’s balance date is July 31.
In May the co-op lifted its forecast normalised earnings to 65-80 cents per share from 55-75 cents per share and said it was on track for a strong full year dividend.
On Thursday, ANZ said its World Commodity Price Index fell 2.6 per cent, month-on-month, in July.
In local currency terms the index fell 3.8 per cent as the NZ dollar appreciated by 1.2 per cent.
“Meat, dairy and aluminium prices all fell as global demand for these commodities weakened further,” ANZ’s agricultural economist Susan Kilsby said.
Dairy prices fell 3.1 per cent month-on-month in July.
“Global demand for dairy products is weak at present and this is particularly noticeable in the products that are heavily reliant on demand from China, including milk powders,” she said, adding global milk production is slowing.
ANZ’s meat and fibre index fell 5.1 per cent July.
“Lamb prices fell and further falls are anticipated as it is becoming very challenging to sell to our international markets at present.
“Beef prices also fell as increased volumes of beef hit the international markets,” she said.
Against the trend, ANZ’s horticulture index lifted 1.6 per cent in July following a 5 per cent lift in June.
Apple prices continued to firm.
“This will favour growers that achieved reasonable yields this season but will do little to help those growers whose crops were wiped out by the cyclones earlier this year,” Kilsby said.
New-season prices for kiwifruit are marginally higher than they were this time last year.
ANZ’s forestry index lifted 0.2 per cent in July, but log prices are still 17 per cent weaker than a year ago.
“Demand from China remains weak, and this situation is unlikely to change any time soon,” Kilsbys said.
As China’s economic growth has slowed, so too has investment in construction and the manufacturing sector, she added.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.