Fonterra cuts milk payout

21:02, Jul 29 2014

Fonterra's reduced forecast farm-gate milk payout will "come as a shock to farmers" facing a $4 billion pay-cut.

The dairy co-operative has cut its new season forecast to $6 per kg of milk solids, or a total payout of $6.20 to $6.25 including dividends. 

While milk supply for the new season is expected to improve once again, total earnings are still likely to come in around $9.7b, excluding dividends.

That is a sharp fall from a bumper return of well over $13b in the latest season, with a final payout estimated at $8.40 per kg, plus a 10c dividend.

ASB and Westpac have forecast the collective income of New Zealand dairy farmers could drop by between $3.8b and $4.3b.

Westpac had revised its forecast to $6 after prices continued to slide at the latest GlobalDairyTrade auction earlier this month.


"This was well below most other forecasts in the market, and will come as a shock to farmers," Westpac chief economist Dominick Stephens said.

Stephens said the final payout remained "very uncertain", with much hinging on future auction results.

"We do expect a very substantial recovery in auction prices, but not until the last quarter of this year," said Stephens. "Presumably, Fonterra's assumptions are similar."

TD Securities head of Asia-Pacific research Annette Beacher said Fonterra's history of downgrades suggested it preferred to make adjustments in smaller increments.

"So we cannot rule out another downgrade in the coming months," she said.

Fonterra chief financial officer chief financial officer Lukas Paravicini said the lower forecast was due to an increase in supply combined with weak demand in some markets.

"This is our best estimate at this time. It does actually include an expectation for global dairy prices to go up somewhat," he said.

"When that will happen and to what extent is very difficult for us to forecast."

Paravicini said underlying demand for dairy and protein was still strong, and Fonterra was confident China would "come back to the market" at some point.

Asked whether last season's bumper return would provide a buffer, Paravicini said some farmers may have already used it to resolve past issues.

Fonterra chairman John Wilson said the drop in returns would have an impact on farmers' cash flows.

"We continue to urge caution with on-farm budgets in light of the continuing volatility in international dairy markets," he said.

The dairy giant opened the season with a solid $7 forecast, which would have been the fourth-highest payout on record.

However, dairy prices have now fallen by a third since January.

The industry's woes have been heightened by a stubbornly high kiwi dollar, which has not fallen in line with commodity prices.

The New Zealand dollar was trading at US85.5c before this afternoon's announcement, and immediately slipped to US85.23c on the news.

However, it is still several cents higher than it was at the beginning of the year, when dairy prices were much stronger.

Paravicini said he supported the Reserve Bank's view that the currency is significantly overvalued.

"We hope and expect it to normalise over time," he said. "We do have quite a significant hedging policy ... which limits the volatility to the exchange rate."

The silver lining of lower dairy prices is lower costs for the co-operative's value-added product range.

Chief executive Theo Spierings said the increased dividend was a reflection of expected higher returns on value-add and branded products.

There would be another update on the business' performance when it announced its annual result on September 24, he said.

After the last dairy auction, where prices dropped 8.9 per cent, Primary Industries Minister Nathan Guy said farmers were "extremely resilient".

He said they were used to dealing with price fluctuations, just as they had to deal with floods, droughts and earthquakes.

New Zealand was still well-positioned to take advantage of a growing demand for protein in Asian countries over the longer term, Guy said.

Units in the Fonterra Shareholders' Fund closed at $6.07, up 1.2 per cent.