Wiseman milk price forecast correct

When on January 16, 2012  Müller Dairies bought Wiseman for £279.2m, the deal was said by Robert Wiseman to make strong strategic sense, to have synergy and the maximise the 'complementary positions' of the two companies.

The 360p/share deal looked good for Wiseman shareholders, who had been trading the stock at 250p. I discovered that a large proportion of the purchase was from a Deutsche Bank letter of credit for €250m, at a rate greater than 5%.

At the time we concluded that Müller would be wanting it's Wiseman dairy farmer suppliers to contribute to the cost, as the opportunities for an uplift in prices, despite the operating synergies, seemed limited.

So it is no surprise to hear that on April 30th Wiseman announced at they would be cutting farm gate prices by 2p (6.6%) to 26.42 p/standard litre.
The company said the decision “reflects the continuing and sustained impact of a challenging market environment and more recently a collapse in the value of bulk cream.”

Pete Nicholson, Wiseman Milk Procurement Director, commented, “After a three year period which has seen our farm-gate price increase five times by a cumulative 4.55ppl, we must now reflect the competitive environment we are operating in...”

The price cut comes at a time when farmers face increased pressure from rising input costs. Dairy producers have warned that milk costs have become detached from production costs, affecting their already slim profits.  It currently costs an estimated 30.1ppl to produce milk in the UK as prices have risen for feed and fuel in particular; last year saw price increases of 17 and ten per cent for feed and diesel respectively.

Nevertheless, returns for producers remain below the EU average. Farming unions have expressed great dissatisfaction. It takes a long time before farmers see any reward when the price of dairy products rise, but they are soon reduced when the price of a product such as cream declines.

Wiseman makes no mention of the debt raised by the companies sale for close on a third of a billion £s, but this must come into the company's calculations. It's very different to the multi-billions of euro money which government spends. Euro money, after all, grows on trees.