Fonterra slashes forecast payout

Today's move is the giant dairy co-operative's second cut to its annual forecast payout, and cuts around $1 billion from the country's economy.

The $1 billion cut is roughly equivalent to losing annual exports to Indonesia, our seventh biggest export market.

In November, Fonterra forecast a payout of $6 per kilogram of milk solids, reduced from the $7 it initially predicted. Last season Fonterra paid out a record $7.90. The 2006-07 payout was $4.35 and the 2005-06 one was $4.10.

The Fonterra Shareholders' Council chairman Blue Read said he was disappointed by the magnitude of the drop.

"After a record payout last year, we went into the season with a payout forecast of $7.00 per kilogram of milksolids. We are now confronted by a reduction of more than 25 percent in our farm revenues for the season," Read said.

"Dairy farmers are used to fluctuating forecast adjustments and the uncertainty this creates but in this environment we would like to see more timely updates," Reed added.

The plunge is due to falling global commodity prices as recession cuts demand and the ongoing melamine saga with Sanlu in China. Fonterra has written off its $201 million investment in a 43 percent Sanlu stake.

The unstable New Zealand dollar is also being blamed for farmers being warned of skinnier pay cheques at the end of the season.

Today's 90 cents cut shaves about $1.07 billion off Fonterra's expected payout for the 1.19 billion kilograms of milk solids produced for the co-operative by more than 10,000 famers. This means the total annual payout is now likely to be just over $6 billion compared to about $9.4 billion last year.

Fonterra chairman Henry van der Heyden said it was now clear that the international financial crisis was hitting the global economy hard and dairy had been impacted along with other commodities. According to ANZ National Bank, prices of New Zealand’s export commodities tumbled 24 percent last year.

"The surplus global supply that was driven by the previous very high dairy prices, together with the contraction in global demand as a reaction to the high prices for dairy commodities has been unprecedented in terms of how fast and how far it has driven prices down," van der Heyden said.

Commodity prices have continued falling since the beginning of the year, he added, and the European Union had reinstated export refunds.

"In addition, as part of the scenarios we have developed looking forward, we are now taking a much more pessimistic view than we were at the end of last year. This reflects the worsening impact of the global economic environment," van der Heyden added.

Fonterra CEO Andrew Ferrier said the macro-economic outlook and dynamics within global dairy markets suggested the industry was in for a difficult 12 to 18 months.

The lowered payout forecast will hit farmers, who will have been allocating their costs and farm spending in accordance to last year's $7.90 payout.

While industry experts have previously said Fonterra's payout will fall below $5 to bring it closer in line with Westland Milk's forecast payout of $4.10 to $4.50, Waikato farmers posting comments on TradeMe's Farming Forum in the last 24 hours remained optimistic that the payout forecast will be lifted later in the season.

The $5.10 forecast is expected to be broken down to a milk price of $4.65 and a value return forecast of 45c, 5 cents more than the last prediction.

MILK SCANDAL

Meanwhile, Fonterra chief executive Andrew Ferrier has denied allegations the company approved a level of melamine in baby milk formula sold in China.

The chairwoman of Sanlu was jailed for life last week for her part in the tainted milk scandal which claimed the lives of at least six babies and left 300,000 sick.

Now Tian Wenhua, 66, claims a Fonterra-appointed director gave her a document showing the levels of the industrial chemical melamine permitted by the European Union.

Mr Ferrier said Tian had been given a document by a Fonterra board member but he also emphasised melamine was not to be used in the formula.

"I do want to be crystal, crystal clear although there was lots of information that was pulled up (about melamine levels) we were vividly clear to Sanlu that the only acceptable level (of melamine) was zero.''

He said at no point did Fonterra tell Sanlu it was acceptable to keep producing formula with melamine.

Mr Ferrier said a Fonterra representative had given Tian the European Union document soon after the board was advised of the contamination on August 2. Mr Ferrier would not name the director who supplied the information.

Fonterra had three directors on the Sanlu board, Bob Major, Mark Wilson and a Chinese national, Patrick Kwok.

China's state news agency, Xinhua, has reported Tian would appeal her conviction.

Two men were sentenced to death for their role in the scandal while three other company executives received 15, eight and five-year sentences.