A continuing global oversupply of dairy products and the impact of a relatively high New Zealand dollar have prompted Westland Milk Products to reduce its predicted pay-out for this season by 40 cents per kilo of milk solids.
Chairman Matt O’Regan advised shareholders yesterday that Westland’s predicted pay-out was now at $5 to $5.40 per kgMS. Advance payments to shareholders will also be adjusted to reflect the lower dairy prices and, therefore, the lower cash flows into the business.
“This will be unwelcome news for shareholders, but not unexpected,” O’Regan says. “At our October shareholder meetings we warned suppliers that the high level of in-market stocks held by dairy customers was producing downward pressure on prices, especially in the area of bulk milk powders where the majority of our business is still conducted. Farmers will have also noted that bank and industry commentators have widely predicted this continued downward pressure on pay-outs throughout the industry.”
O’Regan said that the inventory position for many of New Zealand’s dairy customers is a reflection of some overstocking earlier in the year following supply concerns due to drought, food safety and regulatory changes.
“These concerns are not significant at present and in-market inventory is slowly being consumed. But customers are generally comfortable with their inventory positions into the first quarter 2015, so we do not expect a sudden uplift in demand.
“The lesson from this,” O’Regan noted, “is that Westland’s drive to produce more value added products – such as our move into base infant formula powders and our recent announcement of an investment in a UHT milk plant – is the right direction to take so we are less reliant on the highly volatile commodity markets in future.”
O’Regan said the pay-out will undoubtedly be a challenge for many farmers and budgets will be tight. The company had systems and processes in place to offer every support it can to shareholders who might struggle financially, he said.
Farmers and sharemilkers who were sensible with last seasons’s record high payout will weather the lower payout this season.
Those in their first season will find it harder but the medium to long-term outlook is still good.
In the shorter term businesses that service and supply farmers will find business slows down as costs are cut to match the expected drop in income.