Westland forecasts increased payout next season

Westland Milk Products has confrimed its milk payout for this season and forecast an increased payout for the 2015-16 season:

The Hokitika-based company will pay $4.90 to $5.10 per kilogram of milk solids before retentions this season, having reduced its forecast for the payment for a third time in April. For 2015-16, it expects the payout to rise to between $5.60 and $6.00/kgMS. . .

Westland chief executive Rod Quin while his company’s projection “might be more optimistic than some in the New Zealand dairy industry, it is our considered forecast of the expected outcomes for the approaching season.”

Quin said dairy prices are expected to recover as the 2015-16 season progresses, although “they’re expected to remain relatively low due to ongoing milk supply pressure from the US and the European Union.”

“One bright spot is that Chinese whole milk powder buyers are expected to return with more demand in early 2016,” he said. . .

That’s good news for farmers, those who service and supply them and the wider economy.

Fonterra will make its announcement tomorrow.

Keith Woodford says the advance payment is more important than the forecast:

Most pundits are suggesting an overall expected price for 2015/16 of between $5 and $6 per kg milksolids. But right now that estimate, which is little more than a guess, is largely irrelevant. It is the advance price that counts down on the farm, but which the media largely ignores.

The Fonterra advance payments are also important for Synlait and Open Country suppliers. These investor-oriented companies pay whatever they need to stay competitive with Fonterra.

Fonterra pays what are called ‘advance’ payments on the 20th of the month following when the milk is received. The rest of it dribbles in through to October of the following year.

In a normal year, Fonterra pays these so-called advances at about 65% of the expected final payout. But this year could be different. That is because Fonterra’s own cash inflows during the first half of the year will be modest.

The advance payout keeps money coming in though winter and early spring when cows are dried off and through calving until herds are in full production.

So how should Fonterra price the advance payouts? Should they be priced as a percentage of the early season prices, or should they be based on best estimates of the final price?
If Fonterra bases its advance payments on the current prices, then some farmers are in for a shock. The advances could be well under $4, with a likely figure being in the ‘low threes’.
If Fonterra bases the advance on overall expected prices, then the advance could be closer to $4.
The problem with the second scenario is that the overall price for the coming 2015/16 season is still such a guess. Despite the pundits predicting prices between $5 and $6, the reality is that it could be anywhere between about $4 and $7, or even outside that range.

Last year at this same time, Fonterra was predicting $7 per kg milksolids for the 2014/15 year. Yet the latest estimate for the 2014/15 season, which is now about to end, is $4.50. Surely that should convince everyone that estimating milk prices this far out is almost total guesswork. Quite simply, no-one knows.

The weather, value of our dollar, what our competitors do and supply and demand are all variables which make accurate forecasting difficult.

Everyone knows that international dairy prices are currently very low, but less well understood is the lags inherent in the system. Given those lags, most farmers will have received milk cheques during the current 2014/15 year in excess of $6 per kg of milksolids actually supplied. This is despite the estimate for the year about to end as being $4.50. It is only now that the cash crunch is beginning to bite.

Most farmers will receive some very modest payments in June for their May production, nothing in July, and then some tiny retro payments in August, September and October.
The new season’s payments will include the advance payment on 20th September for August production, with increasing payments in the following months as spring production cranks up. But if advance payments are only in the ‘low threes’, then for many farmers the overdrafts will continue to rise.

Down on the farms, there is a lot of frustration at Fonterra’s failure to accurately predict prices. But that is not Fonterra’s fault; it is the simple reality of global commodity markets. . .

No-one would have predicted going from prices which supported a record payout of more than $8 last season to little more than half that this season.

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