A strong milk price is good for farmers but are cold comfort for Fonterra itself.
A strong milk price is good for farmers but are cold comfort for Fonterra itself.
Economists expect Fonterra's farmgate milk price for 2019/20 be an improvement on the previous year's, but there is a broad range of expectations due to heightened uncertainties on the world trade front.
The forecast takes on extra significance for dairy farmers following Fonterra's shock guidance for a full-year loss ofup to $675 million and no dividend. Major shareholders say that downgrade will weigh on their own earnings and add to farmer malaise.
The co-op itself has a very wide forecast range of $6.25 to $7.25 per kg for 2019/20, against a $6.30-$6.40 range for 2018/19.
Fonterra is expected to revise its forecasts over the next few days, as is required under its enabling legislation, DIRA.
ASB senior rural economist Nathan Penny said that with just 6 per cent of the season's milk collected so far, Fonterra may decide to retain its wide range.
Penny has forecast a $7.00/kg milk price for the current season.
World dairy supply is still tight.
Wholemilk powder prices, which form the basis of Fonterra's milk price, weakened in the first few months of the year before bouncing back in July.
At the last Global Dairy Trade auction on August 21, whole milk powder traded at US$3100 a tonne, up 2.1 per cent from the previous sale.
ANZ rural economist Susan Kilsby expects a $7.10/kg milk price for the current season, thanks to strong whole milk powder prices.
She expects to see some upside in commodity prices as global milk supply growth slows "but the weakening global economic situation does provide some demand side risk".
Bank of NZ economist Doug Steel expects a $6.70 milk price, based on mostly firm prices for wholemilk powder prices so far this year, but he said there were a lot of risks posed to world trade by Britain's exit from the European Union, civil unrest in Hong Hong, and escalating trade friction between the US and China.
Worsening world trade conditions were behind Westpac's economist Anne Boniface's move last week to cut her forecast to $6.50/kg from $6.70/kg.
"The change in view is down to our more pessimistic take on the international growth outlook," she said.
"Our previous view that both sides would eventually step away from the conflict, as it was in neither side's best interests, appears to have been too optimistic," she said.
Dairy farmers are facing tight credit conditions and higher environmental compliance costs.
Farmer-funded Dairy NZ's latest estimate of breakeven is $5.95 per kg of milk solids.
The Reserve Bank, in its latest financial stability report, said breakeven for farmers at the very high end of the debt scale was $6.20/kg.
A strong milk price is good for farmers but are cold comfort for Fonterra itself, as they represent an increased cost for its biggest input - milk.
Fonterra is expected to report a bottom line loss of up to $675m for the year just finished.
Fonterra is next month expected to report a bottom line loss of up to $675m for the year just finished, thanks mostly to $820m to $860m in writedowns of various businesses in several countries.
It will be only the second time the co-op has turned in a loss since it was formed in 2001. Its first loss - last year - came to $196m.
The co-op said it would not pay a dividend for the year to July 31 so that it could pay down debt.
Fonterra's NZX-listed units, which give investors access to its dividend flow, last traded at $3.17. The price has dropped by 35.6 per cent over the last 12 months.
