Fonterra lowered its 2013/14 milk price forecast to $8.40/kg milk solids (-3%, or $0.25/kg ms) and has started next season with $7/kg ms (historically high and well in excess of cash expenditure for a typical farm).
On the face of it, the decline in the milk price is a drag on the economy over the coming 18 months to the tune of $2.6 billion, or 1.1% of GDP, but that dynamic is exaggerated, says the ANZ Bank.
“The coming year’s milk price forecast would be the fourth highest on record if achieved – and the dividend still needs to be added (which should perform better than in 2013/14),” says the ANZ.
From a profitability and cashflow point of view farmers will still be in a very good position over the coming 12 months. In fact cashflow is likely to be very similar to the past 12 months.”
The bank says a stellar productivity story is not hitting the headlines. It is lifting output and also helping keep the cost line contained (which has typically exploded in a good payout year).
“Total milks solids production is up by nearly 10% year-on-year to 1.825bn kg ms for 2013/14. This will eclipse the previous record set in 2011/12 by 8%” – great news for the rural economy, equipment sales and the transport sector.
“This reinforces some of the positive developments in farm systems, skill sets and behaviours in recent times.
“While the dairy payout grabs all the headlines, we note Fonterra is still pushing forward in a number of areas. Such small subtleties shouldn’t be overlooked as they support the medium-term picture,” says the ANZ.
