Falling milk production due to weather constraints has forced Fonterra to reduce sales volumes across its entire product range.
Open Country Dairy wrote to suppliers last month adjusting its forecast milk payout for two settlement periods; for milk supplied between December and February the forecast price has dropped by 35c/kgMS and by 40c/kgMS for March-May supply next year.
The predicted settlement amount (forecast payout for the season) for both periods is $6.10 - $6.40/kgMS. OCD has not changed the advance rates to farmer suppliers.
OCD chief executive Steven Koekemoer told suppliers that the situation changed quickly over the last two months.
”At the last round of supplier meetings we saw global supply and demand tracking well together but had some uncertainty about the EU reaction to higher milk prices.
“What has happened since is a lift in supply of 4.3% in the EU recently and we forecast that it could continue at around 5% for the balance of quarter four.
“Based on the global developments we have decided to take the prudent approach and adjust our forecast. Major banks are sharing this view.
“Buyers are moving into a position where there may be a lack of urgency to purchase as they assess the impact of additional supply.”
Koekomoer says the last auction saw whole milk powder prices recover a little “which was a good sign and could see further improvement if New Zealand milk volumes continue to see butter taking a tumble from its record high prices and the index falling by 11% while the skim milk powder index increased by 4.7%”.
Last month, Fonterra shaved off 35c from its forecast payout, taking the milk price for the 2017-18 season from $6.75 to $6.40/kgMS.
But ASB Bank’s senior rural economist Nathan Penny said there was a “hint of conservativeness” in Fonterra’s revised payout.
ASB is sticking with its $6.50/kgMS forecast.
He points to Fonterra chairman John Wilson saying the lower forecast reflects a “prudent approach” to ongoing volatility in the global dairy market.
“You can see they have erred on the side of caution,” Penny told Rural News.
“Later they talk about how they have actually lifted the advance payments to farmers.
“So on the one hand they are saying they are being conservative, but on the other they are saying actually there’s a bit more underlying confidence by showing they are happy to lift those advanced payments.”