The floating dollar usually insulates us from the extreme peaks and troughs of global commodity prices because when prices fall the dollar does too.
That’s not happening at the moment though, global milk prices have fallen and the dollar has strengthened and that’s one of the reasons Fonterra is forecasting a disappointing $4.55 a kilo of milk solids for the 09/10 season.
Fonterra Chairman, Henry van der Heyden, said a volatile currency and continued uncertainty in international dairy markets made forecasting extremely difficult and a constant challenge in the current environment.
“We were looking at a forecast over $5 when the Kiwi was at 50 cents but the rebound means we’re now working with a dollar that’s 10 cents higher. And, just this week – at a time when we’ve been seeing some tentative signs of recovery in the global dairy market – the US Government has announced export subsidies for their farmers, which is bad news for our farmers,” he said.
. . . Mr van der Heyden said: “We had expected dairy prices to be bouncing along the bottom at the moment, but the exchange rate has been a big negative. It has a huge influence on the Milk Price forecast when you go into the new season with a large chunk of your sales unhedged, which is always the case at this time of the year.”
“Our hedging policy is designed to take out the volatility and provide as much certainty for our farmers as possible. But as a rule of thumb a 1 cent movement in the exchange rate realised over a year has an impact of about +/- 10 cents per kgMS in the Milk Price, with everything else being equal.”
Federated Farmers Dairy section chair Lachlan McKenzie said the numbers were bleak.
“In the 2006/07 season, it was estimated it took $4.54 to produce one kilogram of milksolids before a farmer turned a single cent in profit. There’s very little margin.
Input costs followed the payout price up since the 06/07 season and some have come back a bit in the last few months.
Interest rates are lower and so is the price of fuel; Ballance announced a fall in the price of its fertilser last week and Ravensdown followed with a similar announcement this week so the three big costs on dairy farms have fallen.
However, wages and salaries shot up in the last few years as a steep increase in conversions led to a labour shortage. The shortage has eased but it is very unlikely that wages will have dropped. Employment contracts on dairy farms usually go from June 1 and most will already have been negotiated anyway.
Fonterra Cooperative Group’s forecast payout for the 2010 season could be overly pessimistic because the kiwi dollar may retreat from a seven-month high, while the global economy slump may be past its worst, according to Deutsche Bank. . .
Deutsche Bank chief economist Darren Gibbs said dairy payouts had come down significantly from the NZ$7.60 peak last season, and that although the dairy cooperative would see weaker revenues, farms would also benefit from cheaper operating costs.
“It could be Fonterra under-promising and over-delivering,” Gibbs said. “The kiwi has extended a long way ahead of commodity prices” and any pull-back would give the dairy exporter more breathing space, he said.
Other commentators are saying the same thing.
Fonterra had to revise its forecast payment down twice this season so the company may be taking a very conservative view so that any change they make will be upwards.
But sensible farmers won’t be banking on that when the revise their budgets for the coming season.
Farmgirl notes its not the news the government would have wanted on the eve of the Budget and that retailers in agricultural servicing towns were already noticing a drop in spending.