Reduced Fonterra payout forecast depends on 30% recovery in dairy product prices

Wednesday 24th September 2014

Fonterra Cooperative Group has predicated its reduced milk price forecast for the 2014/2015 season on a recovery in dairy product prices of about 30 percent by March next year, chief executive Theo Speirings says.

The world's biggest dairy exporter today cut its forecast 2015 milk price payout by about 12 percent to $5.30 per kilogram of milk solids from a previous forecast of $6/kgMS, citing weaker global dairy prices. On a conference call, Spierings said the new forecast was based on the assumption that the price of whole milk powder recovers to about US$3,500 a metric tonne in March from US$2,692 a tonne at the last GlobalDairyTrade auction.

He said the assumption isn't out of line with historical pricing, as US$3,500/tonne is the weighted average price over the past five years. Whole milk powder sold at US$3,658 a tonne in the June 17 auction.

Auckland-based Fonterra revised its forecast payout to farmers while releasing results for the year ended July 31, which showed sales climbed 19.5 percent to $22.3 billion. Net profit tumbled 76 percent to $179 million, which Fonterra attributed to "constrained margins" in its food service, consumer businesses and non-milk powder products.

While the 2015 payout forecast was cut, the world's biggest dairy exporter lifted its forecast dividend payment to a range of 25-35 cents a share, from a previous projection of 20-25 cents. That puts the total forecast cash payout in a range of $5.55 to $5.65. Smaller rival Synlait Milk this week cut its 2014/15 season forecast to $5/kgMS from $7/kgMS.

"The market is currently influenced by strong milk production globally, the impact of Russia's ban on the importation of dairy products and the levels of inventory in China," chairman John Wilson said in a statement. "Some relief has been provided by exchange rates, with the New Zealand dollar recently showing some signs of falling against the US dollar."

The kiwi dollar dropped as low as 80.40 US cents, the lowest in a year, after Fonterra's announcement, extending a slide driven by expectations the company would cut its forecast. Fonterra's cash payout in 2014 was a record $8.50, made up of a farmgate milk price of $8.40/kgMS and a dividend of 10 cents, amounting to a $13.3 billion injection into the New Zealand economy.

Fonterra gets caught in a bind when the milk price is high, because it represents an input cost for its consumer and food service businesses. It has unveiled more than $500 million of plant expansion this year after strong milk flows and an extended peak season used up capacity at existing factories and forced the company to channel more milk into lower-margin products.

Fonterra said the outlook for the global economy "remains far from certain" with geo-politics and supply/demand balance likely to be reflected in continued price volatility. It will give a further update at its annual meeting in November.

In its presentation, the company put up a chart titled 'Extreme volatility impacting on margin', which showed prices for products from its cheese stream were below those from whole milk powder in the first half of 2014 before the situation reversed in the second half, when cheese tumbled less than powder.

Wilson said consumer and food service margins were expected to recover in the second quarter of the current financial year. The company kept its 2015 capital expenditure forecast at $1.6 billion.

Normalised earnings before interest and tax from Fonterra's global ingredients and operations fell to $503 million in the latest year from about $1 billion a year earlier.

For Oceania, Ebit tumbled to $31 million from $142 million, mainly reflecting an increase in input costs of $278 million. It noted margin squeeze in consumer brands due to "significantly higher input costs."

In Asia, volumes rose 12 percent to 419,000 metric tonnes, driven by strong growth in China. Still, Ebit fell to $91 million from $209 million on a $164 million increase in input costs. Volumes sold in Latin America rose 3 percent to 387,000 metric tonnes, while Ebit fell to $11 million from $137 million as input costs rose by $112 million.

Units of the Fonterra Shareholders' Fund, which are entitled to dividends on the company's ordinary shares, rose about 1 percent to $6.35 and have gained about 8.5 percent this year.

BusinessDesk.co.nz

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