2 Apr 2015

Price fall 'adds to the pain'

3:18 pm on 2 April 2015

Some frustrated farmers are considering leaving Fonterra after auction prices fell for the second time in a fortnight, the Fonterra Shareholders Council says.

A farmer at milking time in the cowshed on a dairy farm near Cambridge.

Photo: AFP

Prices fell by 10.8 percent in last night's GlobalDairyTrade auction, with an average price of $US2746 a tonne.

Whole milk powder, a key price for Fonterra's payout to farmers, fell 13.3 percent to $US2538.

That figure is now well below the $3500 mark that underpins the co-operative's forecast payout of $4.70 per kilo of milk solids.

Shareholders Council chairman Ian Brown said there were a lot of worried farmers.

"I am getting phone calls from farmers telling me that they are considering leaving Fonterra and going to the opposition," said Mr Brown.

"I wouldn't say that is the majority though ... I think by far the greater view is a sense of frustration and disappointment in terms of Fonterra's half-yearly result."

Peter Moore, the general manager for livestock of rural services firm PGG Wrightson, said farmers would start feeling the pinch next season and many would have to borrow to stay afloat.

"A lot of them will have had some reserves for the beginning of this year so I think what we will see is farmers will be really watching their spending going forward and it'll be a fairly tight next six months for them even if prices lift early next year.

Prime Minister John Key said increased world milk supply was a factor in the price falls, and the long-term trend was up.

Labour Party economic development spokesperson David Clark said the drop would create an economic black hole of more than $6 billion. He said the Goverment should take a role in making sure the economy was resilient and more diversified.

Worse than expected

Federated Farmers National Dairy Chairperson Andrew Hoggard said the overnight drop was worse than expected.

"Pretty much just adds to the pain we've already got. So for a lot of farmers, where we're at right now, isn't sustainable for most farmers long-term.

"We do need a payout [of at] least around $6.00, sort of that long-term average," he said.

"So $4.50 for this season would be a huge kick in the guts, and then depending what we've got next season, it could be even worse."

AgriHQ analyst Susan Kilsby said the fall in the whole milk powder price was larger than expected.

"The futures market was indicating around about an 11 percent fall in that whole milk powder price, when it actually came back by 13 percent.

"It's a very disappointing result."

Prices fell on all products put up for auction, with buttermilk powder slumping 25.1 percent.

But for the first time since October, the quantity sold at the overnight auction rose.

Last week, Fonterra said it would be placing an additional 6230 tonnes of whole milk powder into the global dairy trade auctions held between April and June.

That helped lift the overall quantity traded in last night's auction to 23,162 tonnes, but also had dairy analysts predicting another fall in prices.

Ms Kilsby said another uncertainty for the dairy industry was the removal of the European Union milk quota system.

The quota, brought in more than 30 years ago to manage prices by restricting supply, was lifted yesterday.

"In the short term, there will be more competition in our markets," said Ms Kilsby.

"But over the longer term there is expected to be quite a lot of growth and demand for dairy products, and certainly New Zealand can't supply all that extra growth.

"So it will be a more market-led environment, which will be good for New Zealand farmers over the longer term."

Waikato University's professor of agribusiness Jacqueline Rowarth said the latest slump in prices was grim news for Fonterra and its farmer shareholders.

Professor Rowarth, who is also a shareholder in a Waikato dairy farm, said Fonterra's farmers were already angry over it reducing its dividend forecast and if it was forced to drop its milk price further as well, that was going upset them even more.

"So they will be looking for somebody to blame and obviously they want to blame Fonterra. That's what the shareholders' meetings have indicated around the country. Farmers are furious."