Fonterra not seen meeting its payout forecast despite latest GDT gain

Wednesday 2nd December 2015

Most forecasts for Fonterra Cooperative Group's payout to New Zealand farmers this season remain below the company's estimate even after prices advanced at the GlobalDairyTrade auction overnight, suggesting analysts expect a cut to its forecast.

Average dairy prices rose 3.6 percent to US$2,419 a tonne at last night's fortnightly auction, while whole milk powder prices increased 5.3 percent to US$2,260 a tonne. Prices are still short of the US$3,000 a tonne for whole milk powder that Fonterra has said are needed to support its current forecast for the 2015/16 season of $4.60 per kilogram of milk solids. It will review that forecast next week.

"Current market expectations are for a further lift at the second auction in December. The key question is whether this is enough – combined with other forward-looking indicators – for Fonterra to hold their milk price forecast of $4.60/kgMS," ANZ Bank New Zealand agri economist Con Williams said in a note. "At this stage we struggle to see a favourable catalyst that is likely to deliver the US$3,000/t. Instead we expect a range of US$2,500-$2,800/t, which delivers something between $4.25-$4.50/kgMS."

Estimates for Fonterra's payout range between $4.25/kgMS-$4.60/kgMS, according to a BusinessDesk survey of agricultural economists and dairy market analysts. All except one of the estimates is below Fonterra's current forecast.

Fonterra last week affirmed its payout guidance, although chairman John Wilson said it was dependent on global dairy prices rising in the first half of next year from current unsustainable levels.

Dairy products are New Zealand's largest commodity export and lower global prices are putting pressure on the nation's dairy farmers, weighing on the outlook for economic growth and putting dairy sector debt on the Reserve Bank's radar as a growing risk to financial stability.

ANZ's Williams said prices could pick up should the El Nino weather system crimp local production, if European milk supply slows, if demand improves in key markets such as China, or if production costs such as energy and feed prices rise.

"Most are not picking a more sustainable turnaround until mid-2016," Williams said. "But these expectations keep getting kicked down the road."

BusinessDesk.co.nz

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