Fonterra warns of ‘oversupply’ threat to dairy price revival

(Agrimoney) –  Fonterra cautioned over the dent to dairy market prospects from benign weather in top producing countries as it cut, again, its milk payout this season, and unveiled a 2015-16 estimate termed “grim” by farmers.

John Wilson, the chairman of the Auckland-based co-operative, highlighted that world markets were “oversupplied with dairy commodities”, citing a spur to production from elevated prices in the market in 2013-14.

“This supply imbalance has heighted due to continuing good growing conditions in most dairy producing regions,” he said.

Output growth

The comments came the day after Fonterra revealed a 7.7% rise year on year in its New Zealand milk collections last month, albeit in a seasonally weaker period for output.

That is well above the rate of increase of 1.5% for the first 11 months of 2014-15, which ends this month.

Australian output last month rose by 2.9% year on year, in line with the 2014-15 growth so far, while US production rose by 1.7% last month, as increases in the likes of Wisconsin of 4%, and of 9.8% in South Dakota, more than offset a 2.1% drop in the key state of California.

In the European Union, while output fell by 0.5% in February, the latest data available, this is seen as largely down to a temporary curb by producers to avoid penalties under output quotas which have now been ditched.

Now the quotas have gone, “most commentators believe that European milk production will increase,” Fonterra said in Wednesday’s report.

‘Rebalancing of supply and demand’

Mr Wilson stood by expectations of milk prices recovering “going forward”, and expected to “see a rebalancing of supply and demand over the season.

“However, it is more difficult this early in the season to determine exactly when this recovery will lead to a sustained price improvement,” he said.

The comments contrast with a forecast on Wednesday from smaller rival Westland Milk Products that dairy prices will “start on the road to recovery later in 2015”.

“That said, we don’t expect large price increases – rather a recovery for milk powders by the end of the season to a figure around $3,000 a tonne,” Westland added.

‘Very tough and grim season’

Fonterra cut, again, its forecast for its milk payout this season, by NZ$0.10 to a seven-year low NZ$4.40 per kilogramme of milk solids, while pegging the price for 2015-16 at NZ$5.25 per kilogramme of milk solids.

The estimate for next season, which starts on Monday, is below the NZ$5.60-6.00 per kilogramme of milk solids expected by Westland, although the latter excludes retentions, limiting the comparability of the figures.

The Fonterra figure is also below the cost of production of NZ$5.70 per kilogramme of milk solids “going forward”, as estimated by the DairyNZ producers’ group on Thursday.

“We will see most farmers facing significant negative cashflows for much of the next 12 months leading to an increase in debt and overdraft expenses to get their businesses through another low milk price season,” DairyNZ chief executive Tim Mackle said, foreseeing a “very tough and grim season” for farmers.