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Dairy Australia - Market News

08 October 2014

Dairy Australia - Fortnightly Update - 8 October 2014Dairy Australia - Fortnightly Update - 8 October 2014

Dairy Australia - Market News

Global Developments

As foreshadowed in the last Fortnightly Update (and widely expected), Fonterra reduced its forecast New Zealand Farmgate Milk price as part of its results announcement on 24 September. The new price of NZ$5.30/kg MS (A$5.13/kg MS) reflects ‘continuing volatility’ in the market, caused by strong milk production globally, inventory levels in China, and Russia’s import sanctions.

The forecast dividend range has been widened and is slightly higher at 2535c/share, due to the positive impact of the reduced price on margins, as well as positive stream returns from Non-Reference Commodity Products like cheese and casein. Less than a week after Fonterra’s review, GlobalDairyTrade (GDT) event 125 this week has prompted New Zealand’s banks to again cut price forecasts. Westpac has revised its payout forecast to NZ$4.80/kg MS ($4.64), while ANZ has also revised downwards;toNZ $4.85/kg MS ($4.69). The auction itself saw 55,000 tonnes of product sold (8% higher than the most recent event, but 3% below the same time last month), fetching an average of US$2,599/t – down 7%.

The big fall for WMP did most of the damage to the index. Participating bidders were at their lowest number since June 2013, and auction scheduling may have affected some buyer participation given a public holiday in China. Full results at The European Commission has been forced back to the drawing board on emergency market measures for cheese, suspending the acceptance of cheese into the Private Storage Aid (PSA) scheme (activated in the face of Russia’s bans). The first week of the scheme saw around 85,000 tonnes of cheese claims accepted: almost 90% (75,000 tonnes) came from Italy, despite Italian cheese exports to Russia totalling only 7,000 tonnes in 2013.

The Australian Front

Fonterra-related announcements (on top of GDT declines) putting more focus on Australian farmgate milk pricing: As NZ banks were announcing downward revisions on NZ Fonterra’s farmgate payouts, the Australian Fonterra unit (a) formally confirmed its 2013/14 season closing price of $6.95/kg MS, and (b) keenly communicated the outcome of its September farmgate price review.

Down too is Fonterra Australia’s full-year farmgate payout projection, from the previous $6.10-$6.30/kg MS range to $5.80-$6.00; and ‘steady as she goes’ on the current farmgate price of $5.80/kg MS for the 2014/15 season. Steady, with caution that is, given the surge in global supply and disruption caused by Russian import bans threaten ‘further downside risk to the marketin the short term.’

Still, Fonterra does ‘see [international commodity] prices recovering in the medium term.’ Meanwhile Fonterra CEO Theo Spierings announced that the NZ coop is looking at setting up what has been described as ‘a fund that would connect farmers inNew Zealand and Australia with equity from investors with a bank-like structure.’ As the description implies, investors would contribute monies (a hoped for NZ$50-100m) to invest in assets supporting farm production, such as land or farm infrastructure.

So, another Fonterra fund could reportedly be up and running before 31 July 2015. Murray Goulburn (MG) holding on to both 2014/15 opening price and fund-related aspirations: MG CEO Gary Helou told local media that MG too was ‘holding’ on its $6.00/kg MS opening farmgate price. Mr Helou indicated optimism about the resolution of Russia-related issues and ‘China [getting] back in the market in the next month or two:’ key factors MG cited vis-à-vis a turnaround in international commodity prices.

At the same time, Mr Helou reiterated that an ASX-listed investment trust, agenda item at another recent round of supplier meetings, would serve to fund capital projects to modernise MG’s facilities to ‘connecting the manufacturing plants to consumers and customers in Asia’ and help in ‘strengthening the balance sheet.’ Lion’s farmer-friendlier revised tiered-pricing offers dealing with volatility and attracting new suppliers: Lion Procurement Director Murray Jeffrey said that a guaranteed farmgate milk price of $6.35/kg MS in the first year of a threeyear contract was the current ‘sweetener’ for Lion suppliers.

Under the no step-up offer, suppliers can elect to have up to 50% of milk volume supplied at $6.14/kg MS forthe second and third years, with the remainder supplied at variable pricing (linked to global commodity market prices). Lion milk intake needs across the country are ‘pretty much stabilised,’ although a ‘fraction short in northern Australia;’ Mr Jeffrey suggested that Lion’s strategy hinges not on ‘luck, chance and magic,’ but a branded product mix including higher value segments including dairy beverages and specialty cheeses. Like Fonterra’s recently introduced pricing offers, Lion’s moves could well suit some suppliers looking for ways to manage the inevitable volatility that Australian dairy is exposed to and take advantage of long-term opportunities.

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