Saturday, December 2, 2023

Nervous farmgate milk price predictions

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Fonterra’s first forecast for the new season sends many back to the drawing board.
Fonterra CEO Miles Hurrell says that ‘GDT prices have fallen sharply since we released our opening forecast for the season in May, with the overall index down 16% over that period’.
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DAIRY farmers will look carefully at their budgets following the first Fonterra milk price forecast for the new season at an $8/kg mid-point of a range from $7.25 to $8.75, Co-operative Council chair John Stevenson says.

In the current environment of high interest rates and inflationary costs, the reductions in farmgate milk price expectations are concerning for farmers.

The narrowing of the old season’s forecast range to $8.10-$8.30, effectively a 10c reduction, will not be welcomed by farmers, Stevenson said.

“The financial situation on farm is tight.  This reduction is on top of downwards revisions in February and April and occurs at the end of a season, when farmers’ costs are largely sunk.”

On the positive side, the proposed distribution of 50c a share capital return in August, following the sale of Soprole in Chile, will boost farmers’ cashflows, which have been under a lot of pressure.

Stevenson also welcomed the increase in the Advance Rate Schedule to $6, but farmers will need to be mindful of the possible impact on milk payments and cashflows later in the season of downwards revisions of the forecast.

That scenario played out in the 2022-2023 season, when the mid-point of the forecast began at $9 in May last year, increased to $9.50 in June and thereafter was revised downwards five times (so far) to $8.20.

An early-season advance of 75% of the mid-point rather than 60-65% clearly carries more risk to farmers of a clawback later in the season if world dairy prices fall.

Fonterra said it has built in an expectation that China’s demand for whole milk powder will increase during the coming season as its higher domestic stocks reduce.

Economic recovery in China also underpins Westpac senior agri economist Nathan Penny’s forecast of $10, considerably ahead of anyone else in the prediction game.

“I believe there is more global milk supply weakness than other analysts think,” Penny said.

“Household and retail in China have strongly rebounded from covid and I am bullish on their dairy demand.

“I am still quite comfortable to be on the high side of Fonterra’s range.”  

On the downside of that range, ASB economist Nat Keall defended $7, urging caution on the outlook for the Chinese economy.

“We think Fonterra is right to highlight the healthy WMP supply environment in China: local production continues to boast solid growth at the same moment that domestic consumption is comparatively weak.

“Prices aren’t likely to get an enormous amount of support outside the Chinese behemoth.

“We still think it’s prudent to budget on a price with a ‘7’ handle on it.”

ANZ economists have maintained their forecast at $8.50, being 50c higher than the mid-point of Fonterra’s forecast range.

“Fonterra, like us, expects dairy commodity prices to lift during the season but is uncertain on the timing, partially due to increased stocks of whole milk powder stocks in China,” ANZ said the day after Fonterra’s first forecast announcement.

ANZ agricultural economist Susan Kilsby said reduced demand for liquid milk during the covid lockdowns had turned Chinese dairy companies towards more milk powder, but no one had an accurate picture of the domestic inventories.

“China’s desire is for more dairy self-sufficiency, but milk is not cheap to produce.”

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