Our dairy provinces are reverberating to the news that prices soared at the latest Fonterra GDT auction. The prosperity this brings to the regions will provide a significant counterbalance to the loss of earning power in the tourism sector because of the pandemic.
The average price at the auction climbed 15% to $US4,231 a tonne but, more importantly, the price for wholemilk powder, which is the key to the payout to farmers,rose an astonishing 21% to $US4,364 a tonne. Butter was up sharply to $US5,826 a tonne, or 13.7%.
Overall, the increase compares with a 3% rise at the previous auction two weeks ago.
The main dairy companies have recently narrowed their forecast payouts to farmers for the current season to above $7 per kilo of milk solids.
Dairy prices as measured by the GDT index are now at the highest for more than seven years, but are still short of the 2012 peak.
At the latest auction demand was especially strong from North Asia.
Even though the strong NZ dollar at current levels (some say it is over-valued) penalises exporters, Fonterra suppliers will be expecting the co-op to be at the top end of its forecast payout range of $6.90-$7.50.
Farmers will be anticipating some signal on that when Fonterra presents its interim report on March 17, though CEO Miles Hurrell did warn last month that with dairy prices rising through the first half of the season it will put pressure on the co-op’s sales margins in the second half of its year.
On the other hand it has been a good production season in most regions and morale in the industry has been rising as the shabby criticism of “dirty dairying” levelled at the industry has been moderated by evidence it leads the world in being the most sustainable, with the lowest emissions.
Fonterra is doing its bit to reward farmers with the most sustainable practices by indicating that from June 1 up to 10c of each farmer’s payment will be determined by the sustainable credentials .
Looking to the longer term, if the latest prices hold up, the case can be made that the dairy industry, far from being told to cut back cow numbers as the Climate Change Commission is demanding, should be encouraged by the government to increase production as well as to become more sustainable, with less emissions.
Fonterra – which after two years of steep losses returned to the black last year – more immediately can move ahead confidently on the review it has undertaken of its capital structure. It is still in the process of unloading some of its assets acquired in the era of its previous management and has repaid substantial debt but there is more to do on that front. Whether it can refine its capital structure is a moot point, since each of its 10,000 farmer-shareholders has an opinion on that. There is little doubt however a more efficient capital structure could be devised as chairman Peter McBride showed previously in his earlier role with Zespri.
It still has difficult decisions on how to transition away from fossil fuels at its processing plants and – importantly – to drive ahead with its focus on new value-added products that command premium prices.