Lift in milk payout to record $8.65 – thanks China

Fonterra Co-operative Group Limited has lifted its forecast Farmgate Milk Price for the 2013/14 season by 35 cents to a record level of $8.65 per kilo of milk solids.

The increase – along with a previously announced estimated dividend of 10 cents per share –amounts to a forecast Cash Payout of $8.75.

Chairman John Wilson said the higher forecast was good news for farmers, and for New Zealand.

“The increase reflects continuing strong demand for milk powders globally.

“Last December, the Board approved a forecast Farmgate Milk Price that was 70 cents per kgMS below the Farmgate Milk Price that had been calculated in accordance with the Milk Price Manual.

“We are maintaining this position, with today’s forecast being 70 cents lower than the $9.35 Milk Price derived under the Milk Price Manual.

“The Board has the discretion to pay a lower Farmgate Milk Price than that specified under the Manual, if it is in the best interests of the Co-operative,” said Mr Wilson.

The Board has also approved an increase in the Advance Rate schedule of monthly payments to farmer shareholders.  Payments from March through to June will be 25 cents per kgMS higher than the previously published schedule. . .

The increase will inject another half billion dollars into the economy but next season’s price is expected to be lower:

. . . Westpac senior economist Anne Boniface said they maintained their view that increasing global milk production, particularly in the Northern Hemisphere, would weigh on dairy prices from mid-2014.

”Consequently our forecast is for the milk price to fall next season to $7.10/kg MS.”

The payout along with what is expected to be new record highs in production, would provide a big boost to incomes in the rural sector, and would be a key pillar of stronger growth in the New Zealand economy in 2014.

For the average Fonterra shareholder nationwide with a herd of 402 cows milking 346kg milk solids per cow, it was an additional $48,682 in income, according to DairyNZ data for the 2012-13 season. . . .

The increase is due to continuing demand from China which is now our biggest export market.

In January 2014, goods exports were worth $4.1 billion, with $1.2 billion going to China and $556 million to Australia, Statistics New Zealand said today.

The rise in exports to China, up $590 million, was due to milk powder, butter, and cheese exports, up $469 million. The fall in exports to Australia, down $80 million, was due to unwrought gold and silver, and crude oil.

“A record 30 percent of our total exports headed to China in January 2014,” industry and labour statistics manager Louise Holmes-Oliver said. “These exports were more than double the value of those that went to Australia.” .

The trade balance for January 2014 was a surplus of $306 million (7.5 percent of exports). This is the highest-ever trade surplus for any January month. . .

The free trade deal with China is paying huge dividends.

Increased export income will be welcome at a personal level by farmers and the wise ones will use at least some of the increase to reduce debt.

It will also be welcome at a national level – adding to tax income and helping keep the country on track back to surplus.

 

Aussie milk wars to spawn new co-op

Supermarket wars in Australia have led to sharp falls in the price of milk and  farmers have been paying for it in reduced returns.

However, the supermarkets might have gone too far. Farmers are planning to establish a rebel trading company to compete with the dominant processor, Lion, and supermarkets:

Documents obtained by The Australian show the Dairy Farmers Milk Co-operative — representing 780 dairy farms in NSW, Victoria, Queensland and South Australia producing a billion litres of milk a year — has proposed to its members they consider quitting supplying Lion.

Instead, DFMC is launching a rival co-operative to compete with its own Lion-bonded supply arm.

Instead of being contracted to sell milk only to Lion processing plants — and having to accept the prices Lion offers — the new breakaway group will be free to trade milk across Australia to the highest bidder.

The move follows Lion’s shock announcement last week that it is cutting prices to dairy farmers for off-contract milk supplied to its popular Pura, Dairy Farmers and Big M milk brands to just 12c and 13c a litre in Queensland and northern NSW respectively, and 15c in other parts of NSW, Victoria and South Australia. . .

Farmers in New Zealand are paid for kilos of milk solids and the current forecast payout for this season is  $5.95 – $6.05.

The forecast payout of  $7.50 k/ms in May last year was equivalent to about 66 cents a litre. Someone whose maths is better than mine is welcome to convert this season’s payout to cents a litre, but you don’t have to do it exactly to understand it is still more than 12 to 15 cents even when converted to Australian currency.

That price is simply unsustainable for farmers as one who left a letter to Coles supermarket explained:

A LETTER to Coles posted on its Facebook page by a NSW dairy farmer went viral at the weekend, attracting more than 73,448 “likes” and 4500 comments before it was blocked by the supermarket giant.

But the action by Coles backfired badly, with dozens of online supporters of 31-year-old teacher and farmer Jane Burney re-posting the letter online.

In her letter, Ms Burney, who milks 400 cows at Oxley Island near Taree with her husband says the discounting $1/L milk price war waged by Coles and Woolworths is ” killing the lifeblood of our dairy industry”.

“The ramifications of it are finally rearing their ugly head, 13c per litre of milk is not sustainable; the only winner is the supermarket,” she wrote. . .

Your latest ad campaign sprouting that you support Aussie growers is insulting and misleading; eventually all the Aussie growers, all dairy farmers who work 7 days a week, 14 hours a day, who have been dairy farming their whole life, will have to stop farming as it is no longer economically viable to continue.” . . .

Consumers here complain that too little competition between supermarkets is keeping the price of milk too high.

In Australia the competition has been too fierce for farmers who’ve been caught in the crossfire.

There might be enough of them to make the new co-operative a success but it will have to be strong to stand up to the existing players.

Fonterra: record results highest payout

Fonterra has announced record financial results for 2011 and its highest payout of $8.25 before retentions.

The payout comprises a farm gate milk price of $7.60 per kilo of milk solids and a distributable profit of 65 cents a share.

The payout before retentions is $1.55 higher than the previous season’s $6.70 and better than the previous record of $7.90 in 2008.  The cash payout of $7.90 is also a record and is $1.53 higher than the prior period’s $6.37. 

Other highlights:

• A 13 per cent increase in after tax profit to $771 million for the year ended 31 July 2011.
• A 19 per cent increase in revenue to $19.9 billion, a new record for Fonterra.
• The annual Dividend is being increased to 30 cents per share, a 3 cents per share or 11 per cent increase on last year’s 27 cents per share. Dividends are paid out of Distributable Profit.
• Fonterra’s balance sheet is in its strongest shape ever, with an economic gearing ratio of 41.8 per cent, compared with 44.9 per cent a year earlier.
• Fonterra collected a record 1,346 million kgMS of raw milk in the 2011 season, 5 per cent higher than the prior season.
• Dairy exports for the year totalled 2.1 million tonnes, another record for Fonterra.

A media release form the company says:

The results reflect an improved performance by Fonterra’s ingredients businesses that export to more than 100 markets as well as by overseas consumer businesses, especially across Asia and the Middle East. However, consumer business profits in New Zealand and Australia were down in a tough market environment.

Chairman Sir Henry van der Heyden said the record financial performance and record milk production meant Fonterra would distribute milk payments and dividends totalling $10.6 billion – $2.4 billion more than in 2010 and $1.5 billion more than Fonterra’s previous best year in 2008.

“As Fonterra is a Co-operative that is 100 per cent owned and controlled by New Zealand farmers, that money flows right back into the local economy as farmers reinvest in their businesses and buy more farm supplies and equipment.

“An independent report by the New Zealand Institute of Economic Research (NZIER) last December found that the benefits of a higher Fonterra Payout extend well beyond farmers, as they spend around 50 cents out of every dollar earned on locally produced goods and services.”

Sir Henry said the record Farmgate Milk Price of $7.60 per kgMS was well up on the prior season’s $6.10 per kgMS and reflected the recent strength of world dairy markets, with prices in some categories reaching or nearing historical highs during the past year.  In addition, Fonterra’s hedging policy shielded farmers from the full brunt of a stronger New Zealand dollar, especially over the latter stages of the year.

“We also benefited from record milk production, as some of the best autumn conditions in recent years offset poor weather in many regions earlier in the season.”

Sir Henry said the 2011 Farmgate Milk Price as calculated in accordance with the Farmgate Milk Price Manual is $7.60 per kgMS. The average amount available to pay for share-backed supply is $7.59 per kgMS, after adjusting for winter milk premiums and contract milk discounts.

He said the dividend of 30 cents per share equated to 69 per cent of adjusted Distributable Profit, which was consistent with the Board’s policy to distribute 65-75 per cent of profit after adjusting for one-off items and other factors.

Fonterra CEO Andrew Ferrier said Fonterra achieved a 13 per cent increase in net profit after tax, to $771 million, even after paying farmer shareholders 29 per cent more for the milk they supplied. 

“Although the business was impacted by higher dairy ingredient prices and a fragile global economy, our underlying profitability showed solid growth over last year due to improvements within our ingredients businesses and the strength of our consumer brands.”

Normalised earnings from Fonterra’s Standard & Premium Ingredients segment were 36 per cent higher than the previous year. As segment earnings are dependent on selling a mix of products at average prices above the cost of milk, this was an encouraging result in the face of a much higher Farmgate Milk Price, Mr Ferrier commented. Earnings growth reflected improved efficiencies in the manufacturing and supply chain, refinements to the product mix and growth in the higher-margin premium ingredients business.

Revenue from the consumer businesses hit a new record of $6.1 billion. However, the consumer businesses faced a challenging year as margins came under pressure from the rise in commodity prices.

Mr Ferrier said the standout consumer business segment was Asia/Africa, Middle East, with normalised earnings rising 12 per cent.  “We continue to focus on high quality nutritional and foodservice solutions that leverage our trio of power brands, Anchor, Anlene and Anmum.”

 This result is welcome news for farmers and the wider economy however, the current season is not expected to be as good.

The board confirmed its forecasts for the current 2012 season and 2012 financial year of  $6.75 per kgMS and the forecast distributable profit range is 40-50 cents per share. 

That reflects a softening of global commodity prices since early this year and confirms the wisdom of farmers who have used profits from the past season to reduce debt.

Sir Henry said it was fitting that the record result was achieved as Fonterra marked its 10^th anniversary: 

 “Ten years ago, the New Zealand dairy industry came together to form a national champion in Fonterra. Our collective vision was to create a business with the scale to become a world leader in dairy ingredients and maximise dairying’s contribution to the New Zealand economy.  That’s exactly what Fonterra is doing.”

We can all be grateful that the company is succeeding in its aim and also for the work Fonterra and successive governments have done in opening up new markets in Asia, the Middle East and Latin America.

High dollar stops increase in Fonterra payout

Fonterra has confirmed the forecast payout for this season at $6.60 per kilo of milksolids and said the high dollar prevented an increase.

Farmers who are fully shared up will get an extra 25 to 35 cents per share.

This means an average farmer who is 100 per cent shared up to milksolids production is forecast to receive a total of $6.85-$6.95 per kgMS in cash payments for 2010/11, with the balance of Distributable Profit being retained by the Co-operative.


Fonterra Chairman Sir Henry van der Heyden said dairy market prices were holding up better than initially expected, leading the Board to contemplate an increase in the forecast Milk Price. However, the recent strength of the New Zealand dollar against the US dollar meant it was not prudent to increase the forecast at this time.

Increasing the advance payout from $4.30 to $4.60 a kilo will help cashflows over the next few months but the company warns the outlook is volatile.

Sir Henry commented, “When we issued the season’s opening forecast of $6.60 in late May, we indicated that then market prices could have suggested a much higher Milk Price – but that given volatile market conditions at that time we expected to see some softening in prices and we therefore forecast at a lower level. While market prices retreated sharply over the next few months before stabilising more recently, they have held up better than initially expected. However, we’ve also seen the New Zealand dollar strengthen significantly against the US dollar, eroding the value of dairy export returns for our farmers.

“We should remain cautious as there’s still uncertainty and volatility in global markets and we remain vulnerable to adverse movements in dairy prices or exchange rates which could hit the Milk Price. There is always potential for both downside and upside in the forecast, so I would encourage all farmers to continue to take a conservative approach in their farm budgeting.”

Those of us who’ve learned the lessons of the last few seasons are taking a very conservative approach to budgeting. It’s only a couple of seasons since the forecast payout dropped and we don’t want a repeat of the problems that caused.

Fonterra forecast down

Fonterra has anounced a final payout for the past season of $7.90 a kilo of milk solids with a retention of 24 cents which will give farmers $7.66 in the hand.

That good news is tempered by the news that the forecast for the current season is $6.60 which is 40 cents down from the $7 pay out which had been suggested earlier.

If my memory is correct (and I’m open to correction because it might not be), the average dairy farm’s costs of production are about $4.80 – $5.00 per kilo of milk solids before interest and tax.