A weak milk price would follow a low 2014/15 milk price of $4.40, which itself was a sharp drop from the previous season's $8.40 record high. Photo / Duncan Brown
A weak milk price would follow a low 2014/15 milk price of $4.40, which itself was a sharp drop from the previous season's $8.40 record high. Photo / Duncan Brown
Fonterra is expected to announce a sharp reduction in its farmgate milk price for 2015/6 today, potentially shaving billions off farmers' total income for the year and putting more downward pressure on an already cooling economy.
Analysts expect the forecast, which currently sits at $5.25 a kg of milksolids, to be cut by at least $1.00 a kg, with some predictions going as low as $3.30/kg.
Agriculture information provider, AgriHQ, estimates that a $1/kg drop in the milk price equates to about $2 billion less income for dairy farmers.
What's being announced today? The farmgate milk price forecast for the year - that's the price Fonterra pays its 11,500 farmers for their milk.
What will the price be today? Experts say it could fall as low as $3.50 per kg of milk solids, this would be down from the previously forecast price of $5.25. It hit a high in 2013/14 of $8.40. These payments are made to farmers throughout the year.
How's this set? Through the global price of milk powder determined by international supply and demand. During the past year prices have plummeted because of high production around the world and weak demand, especially in China.
How would a payout around $3.50 affect the economy? The rule of thumb is that for every $1 decline in the milk price represents a $2 billion decline in farmer incomes.
How would this affect farmers? A price around $5.70 is regarded as breakeven for many farmers. Those with high debt from converting other farms to dairy are more vulnerable but banks have said they are working closely with them to avoid problems.
What about dairy prices for New Zealand consumers?They could fall, but slowly. Fonterra points out the latest CPI figures shows the average price for 2 litres of blue-top milk is down 9.4 per cent from its peak in November 2014. The price of fresh milk is the lowest it's been since August 2013.
If the farmgate milk price were to drop the company says it would expect to make some reduction in our wholesale prices. However, there will be a lag because it would not start buying milk at a lower farmgate price until October 1. In other countries there are milk price wars where supermarkets sharply discount, incurring a loss to attract customers.
What's the long term outlook? It could take some time for the price to recover. Around the world all dairy farmers are suffering but internationally New Zealand remains a low cost producer of milk and is better placed to ride out the storm.
A weak milk price would follow a low 2014/15 milk price of $4.40, which itself was a sharp drop from the previous season's $8.40 record high. Economists said the sector can handle one bad season, but two in a row would pose difficulties.
Fonterra is also expected to provide some guidance on how the financial year, which ended on July 31, will shape up, the likely dividend payout, and to issue a production forecast for the current season, which ends on May 31 next year.
Fonterra is in the midst of a business review to slim down its operation to cut costs and make it more efficient.
In July the first wave of consultations with staff resulted in the co-op axing 523 positions.
A second phase started this week, but exactly how may more positions will go will not known until late September.
When the company announced the results for its first half-year in March, executives forecast a final dividend in the 20c-30c range, down from a previous forecast range of 25c-35c a share.
Economists said Wednesday's abysmal GlobalDairyTrade auction, which showed wholemilk powder prices dropping by 10.3 per cent, coupled with a string of other data suggesting the economic growth is slowing, would put more pressure on the Reserve Bank to cut its cash rate.
In May, Reserve Bank Governor Graeme Wheeler cited dairy as an area of risk for the financial system. "Many highly leveraged farms are facing negative cash-flows, and the risks will become more pronounced if low milk prices persist beyond the current season," he said then.
This projected price level will sorely test farm system resilience and confidence.
According to the Reserve Bank, about 30 per cent of dairy debt is concentrated among the most indebted 10 per cent of farms.
GlobalDairyTrade auction prices have been so poor in recent months that some farmers have called for its suspension to allow the market to settle.
Prices have been weak because of overproduction and slack demand.
The farmer funded DairyNZ said New Zealand milk production is expected to fall by 2 or 3 per cent this season, due mostly to a higher than normal cow cull.
Nevertheless, the 2015/6 year has started strongly, according to data from Dairy Companies of NZ (DCANZ).
For the month of June - the first month of the season - milk production was 13.1 million kg of milksolids - up 11.6 per cent on the same month last year, DCANZ said.
At $4.0 a kg, the farmgate millk price has the potential to hit the average dairy farm by $250,000, according to KPMG analysis.
"This projected price level will sorely test farm system resilience and confidence," KPMG farm enterprise specialist Roger Wilson said.
"The individual impacts will vary depending on farm system and debt," Wilson said.
"The outlook is tough but this is the time to apply some science and really examine the options."
With stronger beef prices farmers may look at incorporating an element of dry stock farming, particularly if dairy herd sizes are reduced, he said.
KMPG said expected reduction in supply should contribute to improved operating performance for the dairy companies in 2014/15.
In the 2013/4 year, high milk prices - which represent an added cost to Fonterra's manufacturing inputs - helped drive Fonterra's net profit down to $179m from $736m in the previous year.
Other companies are in a similar boat.
Last month. Open Country Dairy, New Zealand's second biggest milk processor after Fonterra, revised its forecasts for 2015/6 of $3.65 - $3.95 per kg of milksolids, down from a previous forecast of $4.70 to $4.90.
