April 23, 2020

 

Fonterra warns price drop amid global recession concerns

 

 

Fonterra has warned farmers of the global recession that might follow, as brought about by the COVID-19 pandemic which has resulted in global health and economic damage.

 

It was clear that the pandemic would probably impact economies deep into 2021, Chairman John Monaghan said.

 

"We encourage you to consider the level of global uncertainty we are all seeing now and out into the future and be cautious with your significant on-farm decisions."

 

While New Zealand's efforts to contain the virus was "great news," and being a food producer it was better placed than most companies, how its export markets recovered from the COVID-19 ultimately impacted Fonterra's performance, he said.

 

"The global recession will impact people's purchasing power and that will be reflected in prices for all products and services. The scale of the impact is impossible for economists to predict right now," Monaghan said.

 

"Key amongst those markets is China. That economy is slowly returning to a new normal."

 

He said Chinese bidders returned to the last Global Dairy Trade auction at levels closer to their historic participation.

 

"We are starting to see key foodservice outlets such as Starbucks and McDonald's re-open their doors in China. While that's good news, there's a lot of recovery still needed in that market."

 

Monaghan said one of Fonterra's key strengths of was its scale.

 

"We export into every region of the world and manufacture a broad range of products. This means that, even in challenging times like this, we can put your milk into the places and products that will deliver as much value as possible.

 

Dairy companies in Europe and the United States have been dumping millions of litres of milk every week due to the impact of COVID-19 on their supply chains.

 

Monaghan said milk volumes in the US were forecast to be up by as much as 2% on-year.

 

"Milk supply in Latin America, the UK and EU is also expected to be up on last year, with good growing conditions for UK and EU farmers as they went into their spring peak. This is likely to disrupt the global supply/demand balance that has supported solid milk prices in the 2019/20 season."

 

Monaghan said Fonterra had no update for the forecast milk price range for the current season and that a high percentage of milk sales for the season was helping it manage the impact of COVID-19.

 

The cooperative will announce its opening forecast Farmgate Milk Price range for the next season in late May, adjusted to consider global uncertainty, stronger supply signals from key dairy regions, and the US exchange rate as it forecasts what prices could be more than a year from now.

 

ANZ agricultural economist Susan Kilsby said as an essential good New Zealand dairy was better positioned coming through the economic downturn, but it wouldn't go unscathed.

 

She said the extent of the impact was hard to determine.

 

"This year will be harder than ever," Kilsby said. "This economic downturn is huge, you can't get away from it.

 

"One advantage we have in NZ over other countries is more flexible about moving milk production into goods that are in demand. In the US and UK most of their milk goes into cheese and they don't have the production facilities to make other products.

 

"Whereas we've got a real spectrum including milk powder, and some products used by the pharmaceutical industry, where demand has been high."

 

She said if the dairy price fell that would not necessarily be better for NZ consumers.

 

"Generally their profitability should be better when their milk price is low because the product their producing outside those main commodities they're not having to pay as much for the raw product. So the margin is higher there.

 

"For New Zealand as a whole a higher milk price is better. Wholesalers might be able to buy milk cheaper, but that doesn't necessarily pass through the retail chain."