12 Nov 2014

Milk production could fall - Fonterra

3:32 pm on 12 November 2014

Farmers could put the brakes on increasing milk production, in response to the significantly lower milk price this season, Fonterra chairman John Wilson has told its annual meeting.

The co-operative will be reviewing its forecast milk price, currently sitting at $5.30 per kilo of milk solids, again next month.

Commentators say that price, while well below last season's record $8.40 payout, is still unsustainable and will have to fall further but Fonterra is not giving any clues about what is likely to happen.

Chief executive Theo Spierings told shareholders that next year was not going to be an easy year for milk prices and whole milk powder prices needed to rise a lot by March to meet the forecast payout.

Fonterra chairman John Wilson told farmers at today's annual meeting in Palmerston North that they, and the company, had to respond to the continuing volatility in international dairy prices, and for the farmers that could mean trimming milk production.

"We've seen the global prices for wholemilk powder, for example, go from this year's peak in February of $US5000 a tonne, to just over $US2500 a tonne - a price that was last experienced in August 2012.

"The lower forecast for the current season means that farm cash flows will be very tight through the 2015 calendar year."

Mr Wilson said generally good weather conditions across New Zealand had driven milk collection 3 percent ahead of last year.

"Personally, I suspect that tighter on-farm cashflows will mean that over the summer, regardless of weather, we will see more traditional New Zealand farm management practices prevail.

"That means reduced use of feed supplements and increased culling, which will result in a slowdown, if not a decline, in the growth we've experienced over the past three years."

Fonterra chairman John Wilson.

Fonterra chairman John Wilson. Photo: RNZ / Diego Opatowski

Call to halt spending plans

Farmers also voted on a resolution from Marlborough supplier Murray Beach calling on Fonterra to put on hold all overseas investment spending and New Zealand development projects until the payout rose to a minimum of $7 per kilo of milk solids.

Mr Beach said Fonterra had not reduced its spending, despite farmers having three bad payout years out of four.

The company opposed the resolution and said putting investments on hold would hinder its strategy to increase returns to farmers and its ability to respond to volatile market conditions.

Making it binding on the board would also require a constitutional change.

The Shareholders Council has also opposed the resolution, and dairy farmer representative Andrew Hoggard, of Federated Farmers, questioned the practicalities of such a restriction.

"I think most people get the sentiment but the practicalities probably are not right. If you look at most of the investment we're doing at the moment, it's all in new stainless steel here in New Zealand, which is desperately needed to process all these ever-increasing peaks we have."

He said the investments were needed to save processing costs and maintain payments.

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