Fonterra cuts this season's milk price by 10c, forecasts $5.   28 May 2015

Fiona Rotherham

Fonterra cuts this season's milk price by 10c, forecasts $5.25/kgMS for 2015

May 28 (BusinessDesk) - Fonterra Cooperative Group, the world’s largest dairy exporter, has announced a cautious opening farmgate milk price forecast for the new 2015/2016 season of $5.25 per kilogram of milk solids, at the upper end of commentators' expectations, while knocking a further 10 cents/kgMS off this season’s figure to the lowest level in eight years.

Along with its previously announced forecast dividend range of 20-30 cents per share, the change for this season makes a total forecast cash payout of $4.60 - $4.70 compared to $8.50 just a year ago.

Chairman John Wilson said the revised forecast reflected the reality that global commodity prices had not increased as expected in what has become a tough season.

“World markets are over-supplied with dairy commodities after farmers globally increased production in response to the very good prices paid 12-18 months ago. This supply imbalance has heightened due to continuing good growing conditions in most dairy producing regions."

The opening forecast figure of $5.25/kgMS doesn’t include the forecast earnings for the 2015/16 financial year. The advance rate will begin at 70 per cent of the forecast farmgate milk price, with an opening rate of $3.66/kgMS.

Wilson said the forecast farmgate milk price was based on Fonterra’s best view of long-term global dairy supply and demand.

“We can expect prices to recover going forward, and to see a rebalancing of supply and demand over the season. However it is more difficult this early in the season to determine exactly when this recovery will lead to a sustained price improvement,” he said.

Fonterra Shareholders' Council chairman Ian Brown said farmers will be cautiously optimistic at the opening forecast milk price for 2016 given the past season, "however all farmers are by now, very well-versed in the realities of volatility in our industry, and this needs to be front of mind for them as they work through their budgets."

Following criticism of Fonterra on its communication of price fluctuation, Brown said farmers will be expecting the cooperative to let them know about any significant changes that occur through the season "in a timely and transparent manner".

The $4.40/kgMS figure for this season compares to the opening forecast at the start of the season of $7/kgMS.

Fonterra’s new season payment guide compares to the $4.75-to-$4.95/kgMS forecast from the country’s second biggest processor Open Country Dairy and the $5.60-to-$6/kgMS before retentions from Westland Milk Products, the second largest dairy cooperative.

Westland chief executive Rod Quin said yesterday the company expected dairy prices to start on the road to recovery later this year and for Chinese customers to increase demand early in 2016. It is starting the season with a higher-than-usual advance payout of $4.40/kgMS based on the expected need from farmers for cash to keep milk production as high as possible.

In a Global Dairy update released late yesterday, Fonterra said its milk collection in New Zealand was 1.5 percent up on the season to date over last year and the forecast for this season is to end 2 percent ahead despite the drought conditions experienced in the South Island.

Milk collection in Australia is running 6 percent ahead in the season to date with favourable pasture growth conditions across the country. The current Fonterra Australia forecast milk price is $6.00/kgMS.

Earlier this month the Reserve Bank said financial stress in the dairy sector could rise markedly if prices remain at low levels in the 2015/2016 season. Around a quarter of dairy farms are thought to have negative cash flow for the 2014/2015 season and the central bank said indebted farms are vulnerable to periods of reduced cash flow. This season cash flow will be boosted by around $1.50/kgMS due to deferred payments from the strong season previously but deferred payments from the current season will be a lot less.

(BusinessDesk)

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