30 Apr 2015

Price drop another blow for dairy farmers

6:08 pm on 30 April 2015

An already grim season for most dairy farmers has just got tougher, with Fonterra's announcement today that it has cut its forecast milk price to farmers by another 20 cents.

Dairy farmer in a milking shed

There are concerns that pay-outs may be less than some farmers' production costs. Photo: AFP

This would lower its farmgate milk price to $4.50 per kilogram of milk solids.

With a forecast dividend of 20 to 30 cents a share on top of that, it will give the co-operative's farmers a total cash payout for the season of no more than $4.80 per kilogram, not much more than half the total payout of $8.50 that it delivered last season.

Fonterra slashed its milk price forecast four times since it set the opening price for the season at $7 a kilo, with the price held at $4.70 since the end of last year.

It said that it had been forced to drop its milk price again because of the continuing slide in international dairy prices.

Prices in the twice-monthly Global Dairy Trade auctions have fallen by more than 20 percent since February.

Waikato dairy farmer Craig Littin said today's drop in Fonterra's forecast milk payout would be a nail in farmers' financial coffins.

He said that all New Zealand dairy farmers would feel its effects.

Volatile market conditions

Chief financial officer Lukas Paravicini said with market conditions so volatile, farmers should not be getting their hopes up of any recovery in the prices for this season, which is due to end at the end of May.

"While we're getting close to the end of the season, it's still volatile in the market place. The milk price is largely also driven by changes of expectation.

"Right now though, the short term outlook is still fairly supply-rich and demand-weak, so it's hard to see any change in the short term, especially before the end of the season. At this stage, probably precaution prevails over hope."

The country's second biggest dairy co-operative, Westland Milk Products, also lowered its forecast payout this week, to a range of $4.90 to $5.10 per kilo of milk solids.

Payouts for most dairy companies are now sitting somewhere below the $5 mark.

Farmers try to plan ahead

Meanwhile, farmers are calling on milk companies to release details of their advance payments for next season so they can plan ahead with their budgets.

Fonterra said its revised farmgate milk price would mean the advance rate of scheduled monthly payments to farmers will also be reduced.

Federated Farmers dairy chair Andrew Hoggard said this would leave many farmers feeling deflated.

"It just adds more challenges, not only for finishing this season off, but for planning for next season.

"I guess one call would be for the milk companies, Fonterra especially, if we can get a bit of an advance rate coming out sooner rather than later so that we can actually start making some decisions before we set everything up for next season, in terms of stock numbers and all the rest of it.

"Most farmers will be starting to dry off cows and if we find out the advance rate is going to be quite low next season, there may be an option for some farmers to cull a little bit heavier this season, take advantage of good cull cow prices."

Mr Hoggard says this will create big cuts into most businesses.

"It's going to lose quite a bit of money out the cash flow in August and September which is the time where all costs are ramping up, so it could mean people's overdrafts at that time of year, when they're generally already stretched, could get stretched even more."

"There will still be people who have cost of production lower than this: there's still a good chunk of farmers in there, but every time it drops down there's more and more farmers that the pay-out has dropped below their cost of production, so the percentage is increasing."

Mr Hoggard said the pay-outs may be less than some farmers' production costs.

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