Saturday, December 9, 2023

Fonterra farmers lock in over $7

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Nearly 1000 Fonterra farmers have fixed the price of some of this season’s milk production at values up to the most recent $7.28/kg milksolids net.
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They have participated in the inaugural season of Fonterra’s fixed milk price scheme during one or more of the six price offers so far.

There will be one further opportunity, beginning Monday December 9, to finish the seven-month programme for this season.

Fonterra has made six consecutive monthly offerings of 15 million kilos from June to November and farmers have taken up a total of 59m kilos out of the total 90m offered.

Only in August did the application total of 19.4m exceed the offered amount so all applications were scaled back to 77%.

The first five fixed prices were in the range of $6.60-$6.80 net, followed by the November boost of 48c to $7.28, at which 226 applications locked in just under 10m kilos.

The offer price is derived from an average of the daily settlement price of the NZX milk price futures contract for three days following the first GDT auction of the month.

That offer price is advised to all Fonterra farmers on a Saturday morning and they have Monday and Tuesday to make applications.

The offer price contains 10c/kg service fee.

Should the December offer generate a similar uptake Fonterra will have locked in payment for about 65-70m kilos or 4% of its anticipated total supply.

The company says it benefits from knowing the fixed supply price, against which it can make forward contracts of ingredients to overseas customers.

Farmers have secured a guaranteed $450-$490m of payout, distributed according to the normal monthly advance schedule.

Fonterra’s latest farmgate milk price forecast for the 2020 season is $6.55 to $7.55/kg, with a midpoint of $7.05 on which the payment schedule is based.

Should the fixed milk price be below the final payout, monthly retro payments to the farmers for the contracted quantities will cease when the fixed price level is reached.

The distribution of farmers using the fixed price offers has disclosed some interesting facts and figures.

Firstly, farmers appear to have taken small bites rather than apply for their limit of 50% of annual production in one go.

Secondly, the first three monthly total allocations were in the range 11-15m kilos while the second three months were 7-10m kilos, suggesting that as the season progressed farmers had less of their 50% allowance with which to fix.

Thirdly, smaller farms have made up more than half of all applications with more than 900 of the total 1500 applications being from farms under 200,000kg annual estimated production.

Fonterra said the FMP scheme was designed to be easy to use, via the Farm Source website, and while it does have a service fee, it doesn’t require a margin account.

Fourthly, over half of the successful farms committed more than a third of their production, indicating their approval of the scheme.

That occurred in the first year of operation during which GDT prices have increased steadily and the prospects for the farmgate milk price have been improving and are historically high.

The split of the 995 farms was: below 10%, 57 farms; 10-20%, 160 farms; 20-30%, 222 farms; 30-39%, 150 farms; over 40%, 406 farms.

Fifthly, nearly 90% of applicant farms took up offers in the first two months, June and July, suggesting fixed prices are more attractive in the more uncertain early season.

The over-application in August also suggests some nervousness among Fonterra farmers when the application period coincided with the company’s announcements of more than $800m of writedowns and no dividend for 2019.

Sixthly, half of all kilograms allocated to fixed price contracts are to South Island farms, Canterbury, Tasman and Marlborough farms taking 20m kilos in total.

The NZX milk price futures market is showing prices about $7.44 for September 2020 contracts, having climbed steadily up from $6.55 over the past three months.

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