Forecast dairy payout down to $5.10: The key is now costs …

Homepaddock reports that Fonterra has cut its forecast payout for the coming season to $5.10 – well down on the $7.90 paid last season.

This is a significant decline in returns, however even though prices could go lower it is unlikely they will this season.  As a result this leaves us two other factors to look at when figuring out what will happen to disposable incomes among diary farmers:  quantity and costs.

As we are coming out of drought, quantity will have moved back towards “normality” (for an individual farmer) – this should help to improve returns relative to last year – however, farmers would have already accounted for that when making decisions.

The more important factor for me is costs.  Have fertiliser prices begun to tail off?  Will the sharp pull back in fuel prices help out?  These sorts of questions will be key for figuring out how heavily dairy farmers disposable income will suffer during this lull in dairy prices.

  • Yes fertiliser costs have dropped quite a bit. Ballance dropped its price by $35 a tonne earlier this month and Ravensdown had a similar reduction.

  • “Ballance dropped its price by $35 a tonne earlier this month and Ravensdown had a similar reduction”

    About time as well 🙂 – import costs had been dropping rapidly since late last year …

  • Grant

    A dairy economist at Ruakura had a saying “that it takes 3 years to recover from a good year” meaning that in a good payout year cost control and efficiency go out the window in pursuit of a large payout and it takes 3 years for the industry in general to recover and get back to efficient milk production.

  • Hi Grant,

    I imagine it would be even worse now with the high number of recent of conversions to dairy farms. New farms won’t have the experience to produce as efficiently methinks

  • Grant

    The other issue that concerns Fonterra (and the Dairy Board for many years before that) is the structure of the payment system to shareholders – all of whom are farmers. Despite a range of convoluted systems (fair value share price, value add) basically shareholders are paid for the amount of milk they produce. When the price goes up more milk is produced to take advantage of the high price, when the price goes down farmers try to increase production to minimise the drop in income. This year with all the good grass and no drought production should increase.

    Fonterra, faced with falling prices and demand will want to decrease production oflow value dried commodity powders (produced in NZ) and focus on high value liquid consumer products (produced from fresh milk in market). However, their shareholders are trying to increase milk production and Fonterra will be faced with selling the last 10-20%? of commodity powders at a loss – dragging the return to farmers down further.

    Andrew Ferrier has said that he wants to double the proportion of non-NZ milk that Fonterra processes to 50% of total supply. Yet, until Fonterra can separate returns to shareholders from milk supply, increased returns from non-NZ milk will only encourage shareholders to produce more milk in New Zealand and Fonterra will remain a commodity driven company.

  • “This year with all the good grass and no drought production should increase”

    That is the interesting thing about yesterday’s export figures – volume of dairy exports dropped 13% on a year ago. Is that all Fonterra hording?

    “Yet, until Fonterra can separate returns to shareholders from milk supply, increased returns from non-NZ milk will only encourage shareholders to produce more milk in New Zealand and Fonterra will remain a commodity driven company”

    Is value added provided further down the vertical chain? If so I don’t think there is a problem with farmers just producing – unless we influence the global price of milk. Then the issue isn’t value-added persee – but the fact that individual farmers don’t have the incentive to cut prices and increase returns as their is a “positive externality” to other farmers.

    Do we influence the global price of milk? We are 35% of the export market, but we are a low cost provider and only produce 2% of world supply.