At last, a break in the clouds for NZ’s dairy farmers : Fonterra suppliers could be looking at a sharp lift in income, as the co-op revises its forecast range for the milk price to $6.55-$7.55 kg/MS.And the signals are strong enough to underpin projections the milk price will rise to its highest level since 2014 when the price hit $8.40.
This may diminish, if not completely halt, the grumbling in the cowsheds at Fonterra’s dismal performance over the last couple of seasons, racking up losses and cutting its dividend.
Whether it will eliminate the animosity towards the government, which is proposing to penalise dairy farmers over methane emissions and through its freshwater policy, is less certain.
The industry has felt so targeted by the Ardern government that it has fuelled a rural revolt, based on the belief the government is using economic tools to force farmers to cut their dairy herds, and suffer income loss.
The message the government has been sending is that it no longer regards the dairy industry as the backbone of the economy.
As Fonterra CEO Miles Hurrell has been quick to point out:
“One of our four priorities is to support regional NZ. If you take the $7.05 mid-point of today’s revision to our forecast farmgate milk price, it’s another $450m into regional NZ.”
He might have been saying:
“Are you reading me Shane Jones?”
Hurrell says Fonterra’s earnings outlook for FY20 is based on a forecast farmgate milk price, which still falls within the new forecast range of $6.55 – $7.55 kg/MS.
“The mid-point of the revised range does mean our teams will need to continue to push hard to achieve our margins, but so far we’re comfortable with how this season is shaping up in terms of underlying business performance.”
The Advance Rate which Fonterra pays its farmer owners will be set off the mid-point, $7.05 kg/MS, of the revised range.
Fonterra has recently started forecasting its milk price with a broad range –in contrast to stating one figure as was the previous custom.
It has retained a broad $1-wide range in its latest forecast, up from the season-opening forecast of $6.25- $7.25.
Hurrell says the strong demand for the co-op’s milk and the prices that are being achieved, relative to other milk producing regions, underline the rationale of Fonterra’s new strategy to prioritise NZ milk.
Demand for whole milk powder has been firm, and for the full season Fonterra is expecting it to be above last year. Global WMP production is down so far this season and is expected to continue to decline for the remainder of 2019.
Fonterra is also continuing to sell skim milk powder at higher prices than EU and US dairy companies in Global Dairy Trade (GDT) events.
Hurrell says there are positive signals for milk price.
“It is still very early in the season and a lot can change. There are a number of factors we are keeping a close eye on, which is why we’ve retained a wide forecast milk price range.
“These factors include global trade tensions and political instability in some of our key sales regions. And, as is always the case, we cannot predict the weather and clearly weather conditions play a big role in global supply.”
Down on the farm, the evidence is that farmers are lifting output per cow both by breeding higher producing animals but also through new feeding techniques.
What the government doesn’t recognise in proposing that NZ should be in the forefront of taxing methane emissions is that if it blunts the drive to higher efficiency and leads to lower output, the gap will be filled by other countries that are less efficient and contributing more to global warming.