Fonterra makes forecasts for next season this week - ANZ

Analysts at ANZ explained that Fonterra will make its opening milk price forecast for next season by the end of this week.

Key Quotes:

"Where this is pitched is important as it sets the baseline for many dairy farmers’ cashflow over the next 12 months. Historically it has also set wider industry expectations and planning for other dairy processors as well as service and product providers to the sector."

"However, a lower market share of milk supply (approximately 84%) for Fonterra, and opening milk price forecasts being too high over the last two years, have somewhat diminished the wider effects."

"For next season, market expectations on the opening milk price seem to range from the mid-$4/kg MS to $5/kg MS. It seems more likely Fonterra will pitch things at the conservative end if lessons from the last two years have been learnt. Equally, the current ructions in Australia with regulators would also suggest caution."

"However, if a more mechanistic forecasting approach is taken of the currency around the mid-0.60’s and the forecast of wholemilk powder reaching US$2,500/t by December (guidance provided with half-year results) then you get something at the higher end of spectrum. Our modelling of either of these combinations delivers better cashflow over the next 12 months compared with the last year – but only just."

"But when you map this against expected expenditure, many farmers are still struggling to break-even despite cuts in expenditure and other farm management changes to help re-adjust individuals’ and the sectors’ cost base."

"Until the milk price moves back above $5/kg MS (and higher dividend payments persist), it’s going to be difficult for many farmers to generate profit/breakeven. This means the tight cost control impacting on service and product providers is set to continue for at least the next 12 months, if not longer, with many farmers needing to do some balance sheet repair following recent damage."