Fonterra forecasts payment drop on strong kiwi, US subsidies

Wednesday 27th May 2009

Fonterra Cooperative Group, the world’s largest dairy exporter, forecast a 13% drop in milk payments for the 2010 season, reflecting a stronger New Zealand dollar and the reintroduction of U.S. dairy subsidies.

The dairy giant will pay an estimated $4.55 per kilogram of milk solids for the 2010 season, down from the $5.50 a kilogram payment in the current season. Its statement comes after Fonterra’s board met yesterday.The New Zealand dollar has jumped 27% from its sub-50 U.S. cents low in early March. Last week, U.S. Agriculture Secretary Tom Vilsack announced the reintroduction of subsidies for more than 90,000 metric tons of dairy products produced in America, as a means to compete with the European Union’s protections on farming.

“We’d certainly like to see the exchange rate come down and stay lower,” said chairman Henry van der Heyden. “When we’ve been seeing some tentative signs of recovery in the global dairy market, the U.S. government has announced export subsidies for their farmers, which is bad news for our farmers.” The lower payout would take about $1 billion out of the New Zealand economy, he said.

Diary products account for some 20% of the nation’s annual $43.2 billion export market, and rose 4.8% to $8.9 billion for the 12 months to April 30, according to government figures.The kiwi sank to 62.22 U.S. cents immediately after the announcement from 62.44 cents just prior, and recently traded at 62.30 cents.

Van der Heyden said Fonterra had estimated next season’s payout would exceed NZ$5 when the currency was around 50 U.S. cents, as it was from Feb. 25 to March 10. The kiwi’s gain since then means Fonterra is now forecasting an average rate of about 59 U.S. cents for the coming season. The payment for the 2009 season is still well down from last season’s record NZ$7.90 payout.

Fonterra has annual revenues of around $17 billion, and increased its debt gearing in the first half as it stockpiled more product and took advantage of the relatively weaker kiwi dollar.The Fonterra Shareholders Council, which represents the farmers who supply milk to the cooperative, said it was “disappointed” that dairy farm revenues are returning to 2007 levels.

Chairman Blue Read said the reduced returns and higher costs were “sobering”. “While a drop in share price is unfortunate, most farmers are in dairying for the long haul,” Read said in a statement. We’re “confident about Fonterra’s long-term prospects.”

Fonterra set its fair value share, the mid-point of the valuation range provided by independent valuer Duff & Phelps, at $4.52. Federated Farmers, the national lobby group for farmers, repeated its call for an independent review of Fonterra’s GlobalDairyTrade online auction site, which it says runs the risk of driving down world prices for milk powder.

“There are questions around GlobalDairyTrade that need answers,” the Fed’s dairy chairman Lachlan McKenzie said in a statement emailed to BusinessWire. The payment forecast is “bleak,” he said. “If you live in the city and think you’re immune from this, think again. It’s a hell of a lot of money that isn’t coming through the front door of the economy.”

Prices on Fonterra’s online auction snapped a two-month gain in April, falling 4.1% to US$2,144 per metric ton, according to results posted on the GlobalDairyTrade website.

Businesswire.co.nz

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