$8-plus milk price gaining traction
Rabobank has joined the group of milk processors and banks forecasting a milk price of $8-plus for the new season.
Brown says after discussions with Fonterra chairman John Wilson it is clear there is a significant gulf between the higher market price for whole milk powder (WMP) and Fonterra's other products such as cheese and casein.
"While the milk price panel recommended a price of $9kg/MS this is not the price Fonterra is being paid for its cumulative product mix."
Brown says WMP is a lead indicator of the farmgate milk price and comprises around 70% of Fonterra's product mix whereas the other products which make up the remaining 30% have less bearing on the milk price.
"This has resulted in strong upward pressure on the farmgate milk price which if Fonterra was to follow would cause an unacceptable increase in debt and gearing," he says.
"While it is unusual for the board not to follow the milk price panel's recommendations, they are duty bound to act in the best interests of the co-op and make appropriate decisions with this in mind.
"The forecast milk price of $8.30 is still a record and with the 30 cent increase in the December advances rate payout to $5.80. Farmers can continue to feel positive about the outlook for the season.
"Fonterra is working to manage potential risk based on the signals it is receiving, as we do on farm.
"As we know our industry is a volatile one and the dividend announcement, while significant, has come only four months into a season during which the high milk price has made it apparent that it will be a tough year in terms of profitability, particularly for the consumer business.
"The board's announcement regarding further investment in Pahiatua, which will produce higher returning product, is another positive step in terms of managing future risk and maximising Farmers returns.
"Volatility is the only certainty in our industry and as always I advise Farmers to be prudent in their financial planning."
