Payout perplexity – more money for farmers would impede Fonterra’s financial recovery

Synlait  Milk’s  updated forecast  milk price— now  $7.25kg/MS,  up  from $7kg/MS —renews pressure  on   Fonterra  to  hit the  upper limit of  its own  forecast.

For the industry  as a  whole,  the  higher milk payouts  underline  the strong  global demand for  NZ  dairy products.  And  they  provide  some welcome sunshine   into   many of the  county’s  dairy sheds.

When  Fonterra  in  December   flagged   it  was  aiming  for  the midpoint of  its  $7  to $7.60 forecast range, it  said that  a  $7.30 milk price  would be  the  fourth  highest   in its  nearly  two  decades  of  operation.

That  $7.30kg/MS  is  comfortably ahead  of  Dairy  NZ’s  estimate  of break-even  for Fonterra’s suppliers  of  $5.95.

But  now  Synlait is  saying  is it has  raised  its  forecast  payout on the back of  higher than expected commodity prices at the end of 2019.  It believes those will hold in the medium term as supply and demand continue to be evenly matched. 

While  Synlait’s  move   puts  pressure on   Fonterra,   the difficulty  for the giant  co-op  is that the  higher  it  lifts the payout, the more it increases its own input costs  and thus  puts a  brake  on its own drive  to get back into the black after   last year’s  loss.

With  steady   gains  in the  first  two Global Dairy Trade  auctions in 2020,  the GDT  price index  has  recovered  the  surprise 5.1%  slippage   in the run-up  to Christmas.The average price at the latest auction rose 1.7% to $US3434 a tonne.   That is  well  ahead of  the  $3255/tonne  average price  back in  August.

The   question  is  whether   the  upward  trend   will be sustained.  Analysts  have  firmed  up  their own  forecasts,  because    of the prospect     supply     may  not   match  demand.

The forecasts, if confirmed, would mean the best returns for dairy farmers since the record season of 2013/14, when farmers were paid more than $8 a kilo.

The price of wholemilk powder  at  the  latest  GDT  auction, which strongly influences the payouts for local farmers, rose 2.4% $US3233 a tonne.  Butter  prices  also firmed,  reaching   $4250 a tonne,  on the back of   strong demand.

But even if  the industry  is  looking for  prices to  consolidate  around  the  current level   it  doesn’t  want to  experience the boom-and-bust effect   which hit   after the  record 2014 payout. In 2014/15  the payout slumped  to $4.40kg/MS, and the  following season  to  $3.90.

Too  many   within the industry  are   still  recovering from  the  M.bovis  disease  which  afflicted several herds  and left  many   farms struggling to survive.

And  as  well  dairy farmers have had to  confront the  depressive  market influences of  environmental  compliance costs, scarce  labour quality  and  availability  and  most significantly  the decision by the  Australian-owned  banks  to reduce  their lending  exposure  to  dairying.

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