Milk price certainty
Westland Milk has reaffirmed its commitment to pay farmer suppliers 10c above Fonterra farm gate milk price for the following two seasons.
A forecast 15 to 25% reduction across all commodity products for the remainder of the season is the driving force behind the decision, it says.
Chairman Matt O'Regan says the new predicted payout of $4.15 to $4.45/kgMS (previously $4.90 to $5.30/kgMS) will be grim news for Westland's shareholders but, given the widely publicised state of the global dairy market, not unexpected.
O'Regan says lower prices are expected to remain for this season and probably into the second half of 2016 – the beginning of the 2016-17 season.
"As farmers this is extremely unwelcome news," O'Regan says. "It reflects Westland's view of what the market will deliver and we need to signal this to our shareholders so they can plan accordingly."
O'Regan says it is "definitely not a happy New Year" as far as dairy markets are concerned.
"Major volatility from around the globe has share markets on edge with concerns about China's short-term slow down perceived as a key risk to global fortunes, despite that country's 6.8% growth figure."
The major global driver of downward prices, however, is the ongoing growth of milk supply in Europe and the USA, O'Regan says.
"Demand from China is steady, but well down on two seasons ago. Sanctions against Russia remain in place and limit large volumes of European dairy products entering this key consumption market,
"Dairy farmers in Europe are receiving above market prices for milk – due to processors over paying for milk as farmers adapt to the removal of quotas and find a new sustainable farm gate price – which has kept their production higher than expected,
"Our customers are still buying, but have multiple sources and therefore the luxury of choosing from some reasonably aggressive offers as processors look to avoid a build-up of stock."
On the positive news front, O'Regan says the recent lift of sanctions against Iran is good for Westland, which has butter contracts into that market. He also notes that Westland remains confident that it can grow its sales in China, where the slow-down in the Chinese economy has had little impact on the consumer desire for quality food products at the high end of the market.
"With our ability to produce a higher proportion of added-value of nutritional products coming on stream, and our UHT milk plant almost ready to go, there remain good prospects for sales into China with products that return better profits back to shareholders," he says.
