‘Bumpy ride’ for farmers

The boss of Fonterra is predicting “a bumpy ride” for six to 12 months before prices start to recover with its $3.85/kg of milk solids farmgate price forecast announced on Friday “not sustainable”. Asked if the price could go any lower, Theo Spierings says “we are below the bottom”. He hints at major changes to Fonterra’s global trade auction, perhaps introducing a reserve price. “We have to look at some more drastic thinking around our global dairy trade auction because in Europe there’s a kind of a bottom created by governments and we don’t have that, so we have to look at out-of-the-box solutions at that point in time.” The chief executive remains confident “China will not continue on a flat or negative growth, so China will go back to volume growth on a consumer level and the prices will pick up”. He says Russia is welcome to buy Fonterra product on its global dairy auction, but Fonterra will not go against the government’s plea for it to not expand into Russia while New Zealand’s allies have imposed sanctions. “We are not going to have an aggressive policy against the government of New Zealand,” says Spierings. “But the global dairy trade auction platform is a global platform, which is accessible for all bidders.” He sees Iran as having “huge potential” now sanctions are to be lifted and says the totalitarian state is “definitely part of the future plans”. He defends his forecasts of $5.25 last October when he said he disagreed with banks forecasting a payout “starting with a four”. Spierings points to sanctions with Russia, issues in the Middle East and China’s financial crisis as major problems “very difficult” to see coming. A support programme for farmers will be paid from “working capital reduction”. “This is a serious situation and it’s not sustainable,” says Spierings. “Therefore we go back to the strength of the co-op and the support programme. We have to ensure we get through with minimum damage and as strong as possible.” Fonterra slashing its forecast farmgate milk price pay-out to $3.85/kg of milk solids for the 2015/16 season is down from its most recent forecast of $5.25. Including a forecast dividend of 40-50c per share, the total payout forecast is $4.25-$4.35. Friday’s drop may wipe billions of dollars from the rural economy. The fall was not unexpected with most analysts last week picking a payout of below $4/kg. The forecast price cut is the latest in a run of bad news for farmers. Dairy NZ estimates $5.70/kg is the industry’s average breakeven point for most farmers. Fonterra says it will help them out with an additional 50 cents per shared-up kilograms of solids, which it estimates will cost up to $430m in the first half of the season. Spierings says the key influences of forecast earnings are expected to be the positive impact of the lower farmgate milk price on consumer margins globally for New Zealand-sourced products, the contribution from transformation within the business and movements in New Zealand product mix returns. “As part of this work and given the current pressures facing farmers, we have reviewed our capital expenditure for the next two years. As a result, we are targeting a spend of $500m-$600m less for the 2016 financial year compared to 2015.” Meanwhile, Fonterra has reduced its New Zealand mil-volume forecast for the 2015/16 season to 1,589 million kg of solids – two per cent lower than the previous season – to rereflect the likely impact of farmers using more traditional practices to manage their businesses within the limits of a low pay-out forecast. Fonterra has come under fire for its response to lower global commodity prices, including its decision to put more product on a platform on which prices are going down with no set minimum. Jacqueline Rowarth, Waikato University’s agribusiness professor, says Fonterra’s farmer shareholders would be right to call for a vote of no confidence in its board. She says many shareholders are discontented, which is demonstrated by the independent dairy companies having no trouble attracting Fonterra suppliers. “I would say this is a clear indication of no confidence.”