Why Fonterra costs milkers millions

Since the start of the new season, the price of whole milk powder (WMP) on the Global Dairy Trade (GDT) has shown a downward trend. Milk powder was still quoted at $1 per tonne on August 3.155, but on December 5 that amount was still $2.830 per tonne. A decrease of just over 10%. Whole milk powder is seen as the trendsetter on the global market.

Forecast lowered
The first auction of December yielded a small plus. However, due to the extra liters of milk in the European Union (EU), there is still pressure on the price of whole milk powder. As a result of the developments outlined, Fonterra had no choice but to lower the forecast for the milk price from 6,75 New Zealand dollars (€29,05 per 100 kilos) to 6,40 New Zealand dollars (€27,55 per 100 kilos). ). A reduction of 0,35 New Zealand dollars or 5%. This is a hard blow for dairy farmers, as is clear from the reactions to the reduction.

The reduction is not immediately noticeable. This is because Fonterra can fall back on a good financial position, but also thanks to contracts that have been concluded so far and guarantee a good price. These two developments together and the confidence in demand contributed to the fact that the advance could be increased by 2 New Zealand dollars per kilo of MS until March. "Dairy farmers will therefore receive just as much advance, and perhaps even more, than if the forecast for the milk price had remained at 0,10 New Zealand dollars," said Fonterra chairman John Wilson.

Less milk money from June to October
The announcement that Fonterra is increasing the advance payment in a roundabout way means that dairy farmers will only feel the reduction from June to October 2018. Not only does the dairy farmer pay less for the milk, the cooperative also expects to collect 1% less milk. It provides a milk supply of 1,52 billion kilos of MS; worth 9,76 billion New Zealand dollars. This is based on the basic milk price. 

Still a generous amount, but 0,35 billion New Zealand dollars less than with a milk price of 6,75 New Zealand dollars. A response from the dairy farming industry shows that it is not so much the price reduction, and thus the loss of millions of dollars, that hurts the dairy farmers. The sore point is that the sector is still recovering from lower yields in 2013 due to fewer liters produced and a low milk price in 2015.

Test for dairy farming
The price reduction is a test of dairy farming. The challenge is to pay off previously incurred debts and the question of how well that will work this season. Another point of attention is the extra liters of milk in the EU, which can further reduce the milk price.

1 New Zealand dollar = €0,5897Lower price of whole milk powder puts pressure on Fonterra milk price.