Fonterra slashes farmgate milk forecast to $4.70 per kg/MS

Wednesday 10th December 2014

Fonterra Cooperative Group has slashed its forecast farmgate milk price for the 2014/2015 season to $4.70 per kilogram of milk solids from $5.30 per kgMS, due to global dairy trade prices falling to their lowest levels since 2009.

When combined with the previously announced estimated dividend range of 25-35 cents per share, this amounts to a forecast cash payout of $4.95–$5.05 for the current season, Fonterra said in a statement. The Fonterra board met yesterday with the widespread speculation that it would be forced to downgrade its September forecast to under the $5 kg/MS mark.

Chairman John Wilson said that although farmers were expecting this lower forecast, the revision will put pressure on their farming business budgets.

“There is still considerable volatility in global dairy markets,” Wilson said. “Right now we are seeing a number of factors that are delaying a sustained return to higher global prices.”

The global milk supply remains greater than demand, which has resulted in GlobalDairyTrade prices for whole milk powder falling 16.9 per cent since late September, while skim milk powder prices have fallen 7.7 per cent. Whole milk powder sold at US$2,229 a tonne in last week’s GlobalDairyTrade auction, well off the $3,500 tonne a level that Fonterra chief executive Theo Spierings has said the previous $5.30 kg/MS was based on. That has been the weighted average price over the past five years.

“Falling oil prices, geopolitical uncertainty in Russia and Ukraine, and subdued demand from China as it continues to work through inventory are all contributing to ongoing volatility and weak demand,” Wilson said.

“Today’s revised forecast reflects the board and management’s best estimates at this time. Given the uncertainty we are advising farmers to continue to be cautious with budgeting and we will update them as the season progresses.”

The New Zealand dollar dipped as low as 76.84 US cents from 77.10 cents immediately before the 8:32am announcement. It was recently trading at 76.94 US cents.

Fonterra had already trimmed its previous $7 per kg/MS to $6 and then again in September to $5.30 per kg/MS with a dividend range of 20-25 cents per share. That compares to a record $8.40 payout last season.

Spierings said Fonterra was undertaking a targeted programme to generate more cash to support farmers.

“Cash is important for our farmers and for our co-operative,” Spierings said. “We will be further strengthening our tight controls on operating expenditure, and will be driving harder on working capital, and deferring capex, provided this does not slow progress on our V3 business strategy.

“This is a clear signal to farmers that we are all in this together. We are tightening our belts, just as they are.”

BusinessDesk.co.nz

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