The slide in global dairy prices continues to hit Fonterra (FSF), the giant NZ dairy group, and the country’s economic outlook with the second cut in milk prices for the country’s farmers announced in the past two months.
The cut, by 12% to $NZ5.30 a kilogram of milksolids, means the price had fallen 30-35% from the level paid in the current milking season.
The new level is a six year low for payouts to the 10,500 NZ dairy farmers who supply Fonterra, and there’s no certainty there won’t be further falls.
As a result, some analysts estimates the slide could cut returns to New Zealand as a whole by a massive $NZ5 billion in the next year, compared to $NZ13 billion.
News of the slide in prices, revealed with Fonterra’s 2013-14 result drove the Kiwi dollar down to just above 80 US cents yesterday – the lowest the Kiwi has been for a year.
In some respects the slide in global dairy prices now over 40%, is mirroring the slide in iron ore prices and the impact on the Australian economy.
Milk is NZ’s biggest export, iron ore is Australia’s.
While the impact is spread around a number of Australian and foreign iron ore miners and exporters, the drop in dairy returns to concentrated in Fonterra and then its dairy farmer customers which are reported to be already starting to cut spending ahead of the expected slide in earnings in the coming year.
New Zealand has benefited from booming milk sales to China and soaring prices, with exports of milk, butter and cheese hitting a record $NZ13.4 billion (around a third of total exports, in 2013.
That helped (with the building boom, especially in Christchurch) to push GDP growth up 3.9% (annual) in the second quarter, a ten year high.
The $NZ5 billion drop in dairy income is equal to around 2% of GDP, so if sustained, will have a noticeable impact on growth over the next year.
Fonterra reported full-year earnings halved to $NZ503 million in the year to July, at the bottom end of guidance from the company of between $NZ500 million and $NZ600 million.
Fonterra earned a net profit for the year to July 31 of $NZ179 million, down 76% from the record $NZ736 million in 2012-13.
Chief executive Theo Spierings said the group, which has units listed in Australia and New Zealand, had come through a demanding year.
“Our New Zealand and Australian businesses had a challenging year due to much higher input costs and competitive pressure that constrained our ability to pass those costs on,” he said.
Fonterra achieved record revenue of $NZ22.3 billion in the year ended July 31 as prices for dairy commodities soared to record highs.
Fonterra yesterday cut its forecast payout to farmers by almost 12% to $NZ5.30 per kilogram of milk solids.
It was the second reduction in the farmgate milk price forecast for the 2014/-5 year in two months after it was cut by a $NZ 1 to $NZ6/kgs in July.
The current milking season saw a record payout of $NZ8.40 a kilogram of milksolids, so the new price is down $NZ3.05 a kilo or a nasty 35% slide.
The company though didn’t promise that the new price would be the end of the reductions, with the ban by Russia on imports leading to a rise in global supplies, at a time of soaring production.
Fonterra buys milk from about 90% of New Zealand farmers, so the impact of the 35% drop will be spread widely across the industry.
The one bit of good news yesterday was the forecast increase in the dividend to 25 to 35 NZ cents, for farmer shareholders. That’s a rise of 5 cents. It will boost the total return (assuming no more cuts in the milk price) to $NZ5.55 to $NZ5.65 for the current season.
The predicted milk price would mean a $NZ5 billion hit to the economy from last season’s final milk price of $8.40/kgs, which was also announced yesterday.
With a dividend of 10c per share, down from 32c per share, the total cash payout for last season was $8.50, up 38% from the previous year.
The lowered price for the new season and the higher dividend means those gains for the just completed season have been wiped out.
Chairman John Wilson said in a statement that the cash payout to the co-operative’s 10,500 farmer shareholders was the highest ever made since Fonterra’s formation in 2001.
“The Farmgate Milk Price on its own represents an injection of more than $13.3b to the New Zealand economy for the season.
“It is a strong result, reflecting the determination of our farmer shareholders to lift on-farm performance, matched within the business by a focus on driving revenue.
“Our farmers took advantage of good conditions to produce 1,584 million kgs, 8 per cent more than last season, to make the most of the good prevailing prices early in the season.”
The price of Fonterra shares fell 1% in Australia yesterday to $5.73.
