Fonterra, the world's largest dairy exporter, has warned that current global dairy prices are "unsustainably low" and starting to hit production levels.
The New Zealand dairy giant flagged an imbalance between supply and demand which, it said, is a global issue driving down dairy prices.
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"Current prices are unsustainably low and we are seeing them beginning to impact production levels globally," chairman John Wilson explained. "The range of possible scenarios is contributing to the uncertainty we are seeing today. We know the global dairy market will improve. The hard thing to call at the moment is exactly when and how quickly."
Fonterra is attempting to lower its cost base to mitigate this pricing pressure and the group reduced its capital expenditure plans today (7 August). "As part of this work and given the current pressures facing our farmers, we have reviewed our capital expenditure for the next two years. As a result we are now targeting a spend of $500m – $600m less for 2016 financial year compared to FY15." CEO Theo Spierings revealed. This comes on top of 523 job cuts announced last month as part of an ongoing restructuring drive.
Nevertheless, these efforts were not enough to prevent a reduction in its forecast farmer payout. The cooperative cut its forecast total payout available to its members to NZ$4.25-4.35, with the farmgate milk price standing at $3.85 per kilogram of milk solids.
Wilson conceded that this would result in another "tough" season for Fonterra's farmer-owners. The cooperative has therefore set up $430m fund to provide loans to farmers. The loan will amount to an additional 50 cents per shared-up milk solids for production for the season. This payment, interest free for two years, will be paid back when the Farmgate Milk Price or Advance Rate goes above $6.00 per kgMS, the company said.
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By GlobalData"This support is all about standing together as a cooperative and using our collective strength to help our farmers get through these tough times," said Wilson. However, he conceded that the low milk price had already resulted in a drop in milk collections. "We are already seeing our farmers reducing stocking rates and reducing supplementary feeding to lower on-farm costs. In New Zealand we have the advantage of a largely pasture-based system which will allow farmers to lower costs. Nevertheless, it will be a very difficult season for farmers if current prices continue."
