Fonterra forecast helps…if you’re producing

Fonterra Cooperative Group lifting its milk price forecast to $6.90 per kilogram of milksolids (kg/MS), is welcome news to dairy farmers. That said, production from key dairy farming areas is likely to be sharply down due to the spring drought.



“This is very good news but must be seen in the current reality of the drought-like conditions we’re in,” says Lachlan McKenzie, Federated Farmers Dairy chairperson.



“I think you’ll find this season’s production will be down sharply in the upper North Island. It also has to be remembered that the North Island is home to 77 percent of the nation’s dairy herds.



“I don’t wish to take anything away from Fonterra’s announcement. But for farmers, this good news is tempered by the reality that if your production is down, then you’re going to make less this season than last.



“We are also aware of farmers having to dry off stock now due to lack of pasture growth. Once dried off a cow won’t produce until after they calve. So even if we had substantial rain starting today, it wouldn’t materially benefit pasture growth for upwards of four weeks



“That said, the lift in the forecast milk price will give farmers confidence to buy in supplementary feed.



“The point about Fonterra’s excellent numbers I’m making is that our peak producing season has now past. The weather we’ve had has made it far from stellar.



“We can only hope summer rain enables us to keep production going well into autumn.



“While New Zealand’s production is taking a knock due to spring’s drought-like conditions, Europe has seen an acute end to autumn and a severe start to winter. I suspect this could put upwards pressure on the price of dairy commodities.



“The revised forecast also comes off an improved commodities and ingredients picture. On the downside, the effect of the strong Kiwi dollar is pushing down the forecast Distributable Profit to its lower range.



“The dollar is something Government can control directly by way of its spending choices



“I’m also happy at the solidity in the Fair Value Share price currently set at $4.52. The discounted mid-point has moved up to $4.45 from $4.27 auguring well for the future.



“Given Federated Farmers successfully convinced Fonterra to build equity by way of profit retentions, the cooperative now has a strong balance sheet. All we now need for our farm balance sheets is some rain,” Mr McKenzie concluded.