At the start of last year sheep and beef farmers looked enviously at the returns dairy farmers were enjoying and aimed to get prices for meat, wool and other by-products which matched those from milk.
The gap between sheep and beef returns is closing on those from dairying but that owes more to the fall in the price of milk than improved prices from cattle and sheep.
Fonterra has already announced a drop from its opening forecast of $6.60 a kilo of milk solids for the season to $6 and is expected to announce a further fall at the end of the month.
The average price the company got at its internet auction on Tuesday was $US2017 ($NZ3420) per tonne which was 9.3% less than the average in December.
The only glimmer of hope is a small rise in spot prices which might indicate prices are reaching the bottom of the cycle but that’s small comfort when the global price for milk, which peaked at the end of 2007, has fallen sharply since September last year.
The state of global commodity markets isn’t the only problem facing Fonterra which just 12 months ago was being held up as the example the sheep industry should follow as the benefits from the white gold flowed through rural communities and into the wider economy.
The on-going fallout from its investment in Sanlu, one of the company’s hardest hit by China’s poisoned milk scandal continues. Sanlu was declared bankrupt by a Chinese court on December 24th and the way the company has handled the issue doesn’t give me any confidence that it has learnt enough to ensure success in any future investment in China.
However, the financial losses from the Sanlu investment have already been taken into account and disappointing as Fonterra’s payout is expected to be it’s unlikely to fall as far as that of Westland Dairy Co-operative. It’s reduced its forecast payout for the season from the $5.20 to $5.60 a kilo of milk solids announced in November to $4.10 to $4.50.
Making matters worse is Westland’s decision to backdate the forecast meaning suppliers have to pay back money already received.
The reduced payout will mean suppliers will receive $180 million less than expected.
To bring that down to an individual farm: the owner of a 350-cow herd received $90,000 for his milk from Westland last month and had budgeted on getting $120,000 for January but is now expecting just $30,000.
Lincoln University professor Keith Woodford said that given Westland’s position that Fonterra is unlikely to to achieve a payout of more than $5.
Westpac economist Doug Steel has a more positve view and thinks Fonterra could still achieve a $6 payout.
However, the company could do well to follow the advice given to politicians to under promise and over deliver because a lower forecast might help to stabilise or even reduce some of the production costs which rose further and faster than last season’s record payout.
The whitegold has tarnished but most commentators are still confident that the longterm outlook for dairying is positive for those who are able to farm there way through the current lower returns.
Established farmers with good equity will be disappointed by the drop in income and may have to tighten their belts but it shouldn’t threaten their businesses and they’ll be helped by the fall in interest rates and the cost of fertiliser and fuel.
Those most at risk are the ones who have just converted or are in the process of converting for next season who bought land and stock at peak prices; and sharemilkers who bought cows in the middle of last year when values were highest.
However, while the payout obviously has a big impact on financial performance it’s not the only factor to affect profitability.
A speaker at a SIDE (South Island Dairy Event) conference a couple of years ago said he’d had a better result for the year when the payout fell to $3.60 than he had the previous season when it was above $5 because he’d kept a tighter rein on costs when the payout was lower.
P.S. – Cactus Kate, Macdoctor and Inquiring Mind have posts on Fonterra and Sanlu; and Fran O”Sullivan is not impressed by the way the company has handled the issue.