The sky isn’t falling

The cut in Fonterra’s payout isn’t good news but it isn’t the disaster that many are proclaiming.

Nor was the timing the political conspiracy that Winston Peters suspects:

Just four days after the General Election the true state of the dairy industry is revealed – returns for milk that the New Zealand economy is reliant on have slumped.

“Questions need to be asked by New Zealand voters on why they were not informed about this serious decline before Election Day,” says New Zealand First Leader, Rt Hon Winston Peters.

“The drop in payout is a $5 billion hit to the New Zealand economy and 2 per cent off nominal GDP.

“It appears the government and Fonterra joined forces to keep the facts hidden from voters? . . .

Fonterra makes announcements on its previous season’s final payout and any revision to the current one at this time every year.

The record final payout for last season was no surprise. Nor was the cut in this season’s forecast.

Anyone with even cursory knowledge of the global milk market was expecting it after successive drops in the GlobalDairyTrade price index and with the knowledge that the milk supply here and around the world was outstripping demand.

Lower income will impact on farmers, those who service and supply them and the wider economy but the news isn’t all bad.

The value of our dollar fell after Fonterra’s announcement which will help all exporters.

And while dairy prices are falling, demand and prices for sheep meat and beef are improving:

Rabobank New Zealand CEO Ben Russell said the softening in overall rural confidence was clearly a reflection of the impact of the bearish global dairy outlook and lower milk prices on dairy farmer sentiment.

“Falling dairy commodity prices are the overwhelming factor at play here. At the time of the survey being taken, the globalDairyTrade auction prices fell six per cent, taking them down 45 per cent from their February peak,” Mr Russell said.

“And with global dairy supplies continuing to increase from all key exporting regions, a significant price recovery is not imminent.

“That said though, farm commodity prices move in cycles and, clearly, dairy commodity prices are entering a lower part of the cycle right now. While this is always a difficult time, the important thing to remember is the medium to long-term picture for the dairy industry is strong.”

Mr Russell said dairy farmers were also cautious with the dairy industry approaching a critical time in the year, with the peak production and selling period for New Zealand milk just weeks away.

The dampened confidence among dairy farmers was reflected in their business performance expectations in the coming 12 months.

Dairy farmers had the most pessimistic outlook of their own farm business performance. However, Mr Russell said, it should be noted this was coming off record highs for business performance expectations among dairy producers over the past 12 months.

The latest survey found almost half of dairy farmers surveyed (47 per cent) expect the performance of their own farm business to worsen in the coming 12 months, up from 30 per cent with that expectation in the previous quarter. Just 20 per cent expect an improvement in performance, compared with 27 per cent previously. A total of 32 per cent expected performance to remain stable.

While there was also a tempering in sentiment among beef and sheep farmers, after reaching three-year record highs in the previous survey, confidence in this sector remained at overall strong levels.

Mr Russell said lamb prices were up on the previous season and beef prices were currently hitting record highs due to tight global supply.

In terms of expectations of their own businesses, the number of beef and sheep farmers expecting improved performance declined from 57 per cent last quarter to 48 per cent this survey. However, the percentage expecting their farm business performance to worsen remained stable, at just seven per cent. A total of 42 per cent anticipated business performance would remain at the same level.

Despite the decline in overall confidence, New Zealand farmers’ investment intentions were overall stable, the Rabobank survey showed.

Sheep and beef farmers increased their investment appetite – with 43 per cent indicating they intend to increase investment in their farm businesses over the next 12 months, up from 37 per cent previously. Only six per cent intended to decrease investment (compared with four per cent in the past quarter).

For dairy however, investment appetite had waned, with 21 per cent intending to invest less in their businesses (up from just seven per cent with that view in the previous survey) and 20 per cent expecting to increase investment (down from 27 per cent). This was the lowest level of dairy farmer investment intentions in more than five years (since August 2009).

Mr Russell said this change in sector investment dynamics may be an early indication the decline in the national sheep flock and the rate of dairy farm conversions were slowing. . .

Federated Farmers says farmers will be down but far from out:

Fonterra Cooperative Group farmer shareholders will welcome confirmation that the 2013/14 season has ended exactly as promised with a total payout of $8.50 per kilogram of milksolids (kg/MS).  That good news is balanced by a sharp revision downwards in the 2014/15 forecast.

“The 2014/15 season which offered so much has turned into a breakeven one for not just Fonterra suppliers but the entire industry,” says Andrew Hoggard, Federated Farmers Dairy chairperson.

“Like Synlait’s revision this week, there is a ‘good news and bad news’ dimension in this.   The good news is that we take the 2013/14 confirmed payout and the lowest revised forecast for 2014/15, we are talking an average total of $7kg/MS across the two seasons.

“A $5.30 kg/MS milkprice is also a lot higher than some commentators had expected if the forecast sticks.  If being a little word with a big meaning.

“Losing 70 cents kg/MS on the milkprice is really going to hurt.  Farmers will be kicking capital works into touch and will be pruning herds to rid themselves of any passengers.

“Speaking to DairyNZ, farm working expenses this season, before depreciation and interest payments, are expected to be around $4 kg/MS this season.  Feed, fertiliser as well as repairs and maintenance are going to be cut back.  We’ll only do what needs to be done.

“What we know from DairyNZ is that two-thirds of dairy farms have working expenses of between $3.25 and $4.75 kg/MS.  Of course when you start paying back the bank manager, the average cash costs on-farm head up to $5.40 kg/MS.

“As you can tell from what the forecast currently is, the current surplus is a wafer thin 15 to 25 cents kg/MS.  Expressed as retail milk, that’s about 1.25 to 2 cents a litre this season.

“It means that upwards of a quarter of our guys will be making a loss this season. 

“We also believe that unlike the Global Financial Crisis, dairy farmers have been listening and have focussed on building financial freeboard.  Sadly for some farmers, they’ll have to dip into that big time.

“Federated Farmers’ advice is to watch costs but to keep your bank, farm consultant, accountant and family fully in the loop.  Take a no surprises approach to get through.

“This season has been a perfect one for global milk with ideal conditions everywhere compounded by civil unrest in the Middle East and dislocation of European milk due to what is happening in Eastern Ukraine.

“We can only hope there is no more bad news but I am optimistic we may be back above $6 kg/MS for 2015/16,” Mr Hoggard concluded.

Agricultural prices are always cyclical.

Dairy farmers creamed it last season, now it’s sheep and beef farmers who have a brighter outlook. Both know that what goes up comes down and what comes down goes up again, sooner or later.

One Response to The sky isn’t falling

  1. Andrei says:

    Meanwhile Brazil and Serbian dairy firms rejoicing at the new markets for their products in Russia

    Funny old world

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