Fonterra predicts greater pain on horizon for dairy farmers

Dairy market turbulence has yet to run its course and there’ll be more pain ahead for farmers, according to NZ dairy giant Fonterra.

With dairy prices now at a 12-year low, Fonterra CEO Theo Spierings says demand will remain sluggish amid slowing growth and equity market turmoil in China.

Consumption by oil-dependent countries may also be hurt after crude prices plunged below $30 (€28) a barrel this month, the lowest since 2003, said Spierings.

Fonterra has reduced the amount it sells at auctions. 

Canadian processor Saputo is predicting prices will stay depressed, and Fonterra says higher-cost producers will continue to suffer. New Zealand accounts for more than half of world whole milk powder exports.

“There’s definitely going to be pain, more pain, and it’s a question of which supply or which country’s farmers can adapt best to volatility and lower prices,” Spierings said. “In New Zealand, we can breathe relatively easy although there’s pain. Farmers in countries with high-cost prices are going to suffer,” he said.

While the rout in Chinese equity markets has dented consumer confidence, Spierings is banking on the country’s prospects in the longer term as more babies are born and an expanding middle class boosts demand.

Volume growth in China may well accelerate to as much as 5% from the current rate of zero to 1%, Spierings estimated, without providing a timeframe.

Chinese policy makers are seeking to steer the world’s second-largest economy toward consumption-led growth, with old rust-belt industries from steel to cement in decline.

China’s 6.9% economic expansion last year was the slowest since 1990 and the Shanghai Composite Index has dropped about 15% this year amid concerns about the economic outlook.

“I’m much more focused on recovery of demand,” said Spierings, 52.

“Whether it’s China, whether it’s Iran after the lift in sanctions, if you see uplift in importing regions then prices can pick up really quickly.” 

Fonterra is maintaining its farmer payout forecast at NZ$4.60 ($2.97) a kilogram of milksolids, according to Spierings. Should prices in the GlobalDairyTrade index extend losses, the Auckland company may reduce the volume it offers at the auctions.

“GDT is just a sales channel,” Spierings said. “Rather than amending that forecast, we’d better take actions as management, as we’re paid to do, to shift volumes to another channel and create supply-demand tension in GDT.”

The New Zealand dollar will also determine the payout estimate, he said.

The kiwi has dropped about 5.6% this year against the dollar as the US currency strengthened amid rising interest rates.

The average price for whole milk powder was at $2,188 (€2,017) a metric ton as of January 19. Fonterra’s payout forecast assumes a price of $3,000 (€2,769) a ton, the company has said.

Bloomberg


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