Two big announcements awaited from Fonterra – one deals with dairy payout, the other with the co-op’s capital structure

So what  are  the  chances Fonterra’s  payout  to its farmer-suppliers  could  top  $8kg/MS the  soon-to-end  current  season?

That would give a  timely  boost  to  the  rural economy  and give  farmers  the kind  of  surge  in incomes  which  would encourage them  to  step up the  pace  of  adapting their dairy farming practices as  the  country  moves  to meet its  climate  change goals.

In March, Fonterra raised its forecast milk price for this season to between $7.30 and $7.90kg/MS with a mid-point of $7.60. That was up from $7.14 last season.

But now, after several  good  results  from the fortnightly GDT auctions, and indications from futures contract prices, the  speculation  is that the payout  could go  higher.

While the GDT index slipped 0.7% at the latest auction this week, the price of whole milk powder, which has the most impact on what farmers are paid, gained 0.7% to an average US$4115 (NZ$5756) a tonne while skim milk powder, the second-most important, rose 2% to US$3433/t.

Butter prices slumped 12% to US$5035/t, weighed down by extra volume on offer.

Why farmers are whooping a hurrah for Hurrell (and why the rest of the country should be cheering too)

New Zealand’s giant dairy co-op, Fonterra, is back in its leadership role  in the  country’s  key  export  industry, feeding  a  revival  of  optimism among its 10,000  farmer-owners  as  it  reports a  “positive”  half year  result  alongside a  strong forecast  farmgate milk price.

Fonterra  CEO  Miles  Hurrell summed  it  up  neatly when he said :

“Despite  the major impact Covid is having around the  world…it’s  during these times you really can see  what makes our co-op special”.

  Hurrell  himself  can take a  fair chunk  of the  credit  for turning  the co-op’s fortunes around,  after the previous  executive regime cost it  billions.

He  said  the  co-op  had a “great” first half. Although revenue was down slightly to under $10 billion, earnings from China rose  by  more than a third.

Fonterra milk price forecasts give a fillip to farmers and the regions – the co-op has become an NZX favourite, too

Fonterra has  confirmed  what  most analysts  had  been predicting and lifted its 2020/21 forecast farmgate milk price range to  $7.30 – $7.90 kg/MS, up from  $6.90 – $7.50. This should  send a  further surge of  confidence  across  NZ’s  rural regions, hopefully in  a  wave  strong enough to encourage  farmers  to plan to  increase production  next  season.

As  a  result  of  the  higher  payout, the co-op  will be  pumping $11.5bn  into the  rural economy, well ahead of the $10bn predicted  last year. Although  farmer-suppliers  to Fonterra  are paid off   the mid-point  $7.60  of the new range, most analysts  believe the final payout will reach $7.90.

That  should  ensure a  handsome  return  for most  suppliers,  whose  cost  of  production averages  around $5.80-$6 kg/MS—and for the  highly  efficient, at below $4, an even   better one.

Dairy price lift will give fillip to regional economies and fortify Fonterra’s confidence in pressing on with capital restructuring

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.

Rising world market prices for our dairy products give all of NZ cause to cheer

Covid-19 has  delivered a body blow to NZ’s international  tourism  industry and bruised university incomes from foreign students — but NZ’s  primary industries  are rising to the  challenge  and yielding impressive returns week  by week.  As  a  consequence, NZ’s  economy  is  not  sustaining  the  kind of Covid damage   which – for example –   lowered  the  United Kingdom’s  GDP  by 9% last year.

Defying predictions, the dairy sector has started  the  year   strongly.  Moreover,  lamb markets did not move down as  expected but have  marginally improved  while  demand  for beef  from China has been  strong.  Log   returns are  trending up.

On the  other  hand, in horticulture, the  results  so far  have been variable:  for  example  cherry orchardists’  crops  were devastated by  the weather.

For  primary  exporters  the  problems have come  from different quarters,  first  in logistical challenges and second   from the  currency  which  has  moved up  to 72USc.  Nevertheless,  the  basic  message  is  that  the  rural  economy   has helped to fill  the  gaps  left  by the  destruction  caused by  the  Covid-19 pandemic.

Dairy prices and Fonterra’s re-establishment as a global leader should be celebrated far beyond the cowsheds

The New Zealand economy, although battered  by the  Covid-19 pandemic, has  moved   into 2021  in  better  shape  than  anyone  might have predicted  just six months ago.

To  a degree  this has been due  to  the  continuing vibrant performance  in the export  sector  particularly  by the  primary industries. This  week  there  was a  fresh surge  of  confidence   within that sector  because of the signal from the big dairy co-op, Fonterra, in lifting its  milk payout  forecast.

Fonterra  now expects to pay farmers between $6.90-$7.50kg/MS. That is up 20c a kg from its previous forecast range of $6.70 -$7.30.

Analysts  had  seen this  coming  and  as  Point  of Order  has contended  in recent  posts  it is the  message the  rural regions  needed as  they made  plans for  the  coming year.

O’Connor phones to mollify the Aussies after trumpeting the pay-off from mollifying Beijing

Trade  Minister Damien  O’Connor  trumpeted  this week that the  New Zealand  and  Chinese  governments had signed  an upgrade to  the free trade agreement  between the  two countries.

We suspect he will be more coy about his contribution to the New Zealand–Australia relationship because his trumpeting – loud enough to cross the Tasman – included advice to Canberra to “show respect” and act more diplomatically towards China.   

The Aussies have been riled by those remarks, according to the Sydney Morning Herald:

Senior Australian government officials are infuriated at Mr O’Connor’s comments, which they see as a continuing pattern of New Zealand not joining other allies in standing up to China’s growing assertiveness in recent months.

China’s relations with Canberra remain frozen as a consequence of the Morrison government’s call for a Covid-19 inquiry and a series of punitive trade actions has been taken against Australian export sectors.

Stronger business investment – by farmers, too – is essential for NZ’s post-Covid recovery

In  its Thursday editorial  the NZ  Herald  speaks an important truth:  “Investment important to  stay  on  track”.  This  won’t  have  startled  its  more literate  readers but  in  its text  it notes  the  strong result  in the latest  Global Dairy Trade auction, which  prompted Westpac  to raise  its  forecast  for  dairy giant Fonterra’s payout  to its farmers to $7.50kg/MS  this season.

“If  this turns  out to be correct,  it will represent the highest  payout in  seven years for  a  sector of  the economy that is arguably still  NZ’s  most  important, even before international  tourism was effectively suspended by Covid-19”.

The  Herald editorial  goes on to make the case that despite the buoyant mood,  the  only  realistic  way for  NZ to remain   in such  solid shape in the  post-Covid era  is  through stronger  business  investment.

This  is  the theme  which  Point  of  Order  set  out  earlier  this  week when it  contended  Fonterra  should go hard  with this  seasons’s payout  to  encourage  investment  by its farmer-shareholders  in expanding  production.

Here’s the chance for Fonterra to play a leadership role and spur the others with its milk price

Dairy prices increased by 3.9% across the board at the latest Fonterra global auction. The lift followed rises of 1.3% and 4.3% in the December auctions which took dairy prices to their highest level in 11 months, defying those analysts who believed Covid-19 had disrupted dairy markets.

In the latest auction WMP rose 3.1% to $US3,300 a tonne, its highest level in 12 months. Other significant movements included a 7.2% lift in the price for butter to $US4,452 a tonne.

ANZ agricultural economist Susan Kilsby said the auction results came as a great surprise and as a very positive start to the new year. She contends it strengthens the likelihood Fonterra’s milk price payout this season will be closer to the higher end of the range Fonterra is currently forecasting.

The big co-op in December narrowed the range to $6.70/7.30kg/MS.

So what are the chances, if the trend evident in recent GDT auctions continues, of the payout going even higher?

Dairy farmer confidence is improving but there are challenges in export markets

The dairy industry  has  recovered some  of  its  confidence, as  its  role  as the  backbone  of  NZ’s  export structure has  moved  into sharper  relief  in the  Covid-19  pandemic.

Rabobank’s  latest quarterly survey of  farmer confidence says  it  has improved from  minus 32%  to minus 23%, with  demand  for  NZ dairy products  holding up well  since the  previous survey  in September.

The  dairy  industry  over  past  seasons   has  been the  target  of  urban critics  for  so-called   “dirty dairying”, climate  change  warriors  who want a reduction in methane emissions,  and the  government, which is implementing  new  freshwater regulations. Internally the industry was  stricken  with  the  financial  woes   of   Fonterra.

Even  now  as the  industry absorbs the evidence  for greater  confidence,  it   is  not  without  strategic  concerns.    Most  of  these  are focused  on  its  Chinese markets  following  the  problems being encountered  by Australian exporters in the  wake  of retaliatory action by  the Chinese  government.