Thursday, March 28, 2024

Break-even is now realistic

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Recovering world dairy prices from the rebalancing of supply and demand made a welcome impact when Fonterra increased its milk price forecast by 50c to $4.75/kg milksolids.
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The 12% improvement was satisfyingly early and bold for New Zealand dairy farmers, who had suffered the slump for two years, were first in the world into the downturn and were now leading the way out.

Fonterra’s concurrent guidance of 40c/share dividend to be added to the milk price lifted the payout expectation to $5.15/kg, better than break-even after paying farm working expenses, rent and debt servicing.

The advance payment, payable on September 20, was also increased by 10c to $2.80 but the full impact of the improved payout would not show up in farmers’ bank accounts until much later in the season.

The positive announcement would boost confidence among dairy farmers and ease the worries of bank managers, Federated Farmers dairy chairman Andrew Hoggard said.

"It’s still early days but this is a very positive signal for the guys out there who are struggling and need to know there is some relief in sight.

"International markets are still volatile and we don’t want to rely on the global trading trends just yet but this is a positive move and gives us room to be cautiously optimistic," Hoggard said.

Better budgets, possibly break-even ones, could now be put before bankers, underpinning overdrafts and cashflows for the rest of the season.

Northland farmer Terry Brenstrum of Te Kopuru said the lift in forecast was a morale-booster and the market appeared to be heading in the right direction.

But there was a long way to go to the end of the financial year and many dairy farmers were still under significant stress.

“Keep a look out for one another – that’s my plea,” he said.

“Keep a hold on spending and do the basics right although it is good news that break-even is now realistic.”

"It’s still early days but this is a very positive signal for the guys out there who are struggling and need to know there is some relief in sight.”

Andrew Hoggard

Federated Farmers

The milk price revision was scheduled under the Dairy Industry Restructuring Act but surprised farmers with its prompt arrival and size.

GlobalDairyTrade prices had improved 20% in one month, over the past two fortnightly auctions, but this time last year the dairy market spiked then collapsed again.

Last season Fonterra opened optimistically at $5.25, made a huge cut to $3.85 in August, improved the forecast to $4.60 in September, only to end at $3.90.

Although Fonterra was obliged to publish what the milk price formula indicated, farmers would be worried about a repeat of the 2015-16 rollercoaster ride.

BNZ senior economist Doug Steel said the higher milk price forecast would deliver $900 million to farmers over the season, if sustained.

“It is a big morale boost and will fix some big holes in balance sheets,” he said.

AgriHQ dairy analyst Susan Kilsby said the prompt revision was somewhat unexpected, though her spot price indicator after the last GDT auction was $4.69 and the season-long forecast rose to $5.46.

Less than 20% of this season’s milk had been processed and sold, so both Fonterra and AgriHQ were factoring in futures prices and other market indicators for the remaining 80%, she said.

September futures contracts for whole milk powder were at US$2850, compared with $2695 average on GDT, and selling at $3100 for next June.

Milk price futures contracts had lifted to $5.11 for this season and $5.60 for next season.

Contracts covering more than 10 million kilograms of milksolids had been traded since the market opening in late May.

Fonterra explained the milk price improvement by referring to global supply and demand continuing to rebalance.

Milk production in the European Union was now in decline and Fonterra’s milk collection in NZ was down 4% this season to date.

Fonterra also warned about continued volatility in world markets and the strength of the NZ dollar, which was dragging down export revenue.

Kilsby said her model factored in the exchange rate at US69c, which was too low compared with the current level, and that every one cent movement resulted in 10c/kg change in milk price. The dollar was worth 73 US cents on Friday morning.

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