Fonterra urges caution as farmers face an uncertain season

Fonterra chairman John Monaghan. Photo / NZ Herald

Fonterra chairman John Monaghan has urged the co-op's farmers to be cautious about about their on-farm investment decisions over the year ahead due the uncertainty posed by the Covid-19 pandemic.

His warning comes as economists' season-ahead milk price forecasts turn bearish as the coronavirus continues to disrupt markets and economies around the world.

Rural lending specialist Rabobank is predicting just $5.60 per kg milk price for the upcoming season because of the likely impact on the market of the pandemic, while most others predict $6.30 to $6.50/kg.

"It's clear that the Covid-19 outbreak will continue to have an impact on the health and wellbeing of people and economies across the globe for an extended period, likely deep into 2021," Monaghan said in an email to farmers.

"As a food producer of New Zealand dairy, our co-op is better placed than a lot of other industries, but we are still being impacted," he said.

Fonterra will announce its 2020/21 forecast late in May.

"We encourage you to consider the level of global uncertainty we are all seeing now and out into the future and be cautious with your significant on-farm decisions," he said.

Fonterra's forecast for the current season, which ends on May 31, is $7.00 to $7.60/kg.

Rabobank's low-ball season-ahead forecast has had a depressing impact on the NZX milk price futures contract - which farmers use as a hedging tool. The September 2021 milk price futures contract last traded at $6.10/kg.

Nigel Brunel, director of financial markets at OM Financial, said dairy futures looked to be a mixed bag leading into Wednesday's twice monthly GDT auction.

Markets had been spooked by reports of milk dumping in the United States and Europe but Brunel said that was more about the inability of supply chains to deal with the collapse of the foodservice industry and hospitality than a lack of demand.

"If you look at the GDT outcomes since the outbreak, the futures market has been calling it down further than it actually went down, and last time it actually went up, so I'm not that bearish."

At the last auction on April 8, whole milk prices - which have the greatest bearing on Fonterra's farmgate milk price - rose by 2.1 per cent to US$2,820 a tonne.

Monaghan said China's participation at the last GDT auction was getting closer to normal.

"We are starting to see key food service outlets such as Starbucks and McDonald's re-open their doors in China. While that's good news, there's a lot of recovery still needed in that market," he said.

Monaghan noted that EU and US peers were pouring their milk down the drain due to the impact of COVID-19 on their supply chains.

Fonterra is urging caution as farmers face an uncertain 2020/21 season. Photo / NZ Herald

The US are the world's second largest milk producer and their milk volumes were forecast to be up by as much as 2 per cent, year-on-year, he said.

Milk supply in Latin America, the UK and EU is also expected to be upon last year,with good growing conditions for UK and EU farmers as they went into their spring peak.

Monaghan said this was likely to disrupt the global supply/demand balance that has supported solid milk prices in the 2019/20 season.

Fonterra chief executive Miles Hurrell said a large product range and diversity of markets was "saving" New Zealand's single largest export earner under the covid-19 global pandemic.

"China goes through a hole in the floor in February and we can move those products into retail in Australia, for example."

Speaking at a Trans-Tasman Business Circle webinar, Hurrell said the crisis had reinforced the importance of being able to adapt to market conditions, saying that Fonterra's product diversity was a "huge plus" at present, despite calls to focus the company into specific product categories as part of its "reset".

Additional reporting, BusinessDesk