Fonterra holds forecast payout price, surprises economists

Fonterra chairman John Wilson.
Fairfax NZ

Fonterra chairman John Wilson.

Recent lifts in dairy commodity prices are not enough to justify Fonterra raising its milk-price forecast, chairman John Wilson says.

To the surprise of economists, the co-op's board today held its milk-price forecast at $4.70 per kilogram of milk solids for the 2014-15 season.

Along with the estimated dividend range, this amounted to a forecast cash payout of $4.95 to $5.05/kg for this season when a dividend range of 25c to 35c per share is included.

GlobalDairyTrade prices for whole milk powder had increased 45 per cent and skim milk 13 per cent, Wilson said.

"But at the end of the day as we announced in December, we need prices - and we expect prices - to continue to strengthen over the coming months to around that $3500 [per tonne] price level, at a minimum," he said in the dairy giant's quarterly forecast update.

"Those prices had to lift to support the $4.70 [price], and that's still our forecast."

Last week's auction saw overall prices average $3366 and whole milk powder prices reach $3272.

Wilson said recent downward movements of the dollar were pleasing and he hoped the trend continued despite the currency rebounding in the past few days.

Fonterra's quarterly update is required under the Dairy Industry Restructuring Act (DIRA).

Commenting on the decision, ASB said its market surveying had indicated an upgrade to $4.80 for the 2014-15 season "while we had pencilled in $5.00/kg".

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Westpac senior economist Michael Gordon said it was expecting a $5 payout and although that required a further pickup in global commodity prices, "we're reasonably confident that this will happen as drought conditions in New Zealand put a squeeze on the global milk supply".

However, Fonterra's decision to hold its forecast suggested it was "not confident enough about future prices to make a formal change at this point". 

At $4.70/kg, the dairy farmers who supply milk to Fonterra face a big income drop on last season that ended in July 2014, which paid a record $8.40/kg.

Wilson said the significant volumes on the world market meant products were significantly underpriced.

He acknowledged it had been a difficult year for farmers. It had been dry and milk prices continued to be low, and it was important farmers continued to be cautious in their budgeting.

Wilson, who farms near Te Awamutu said he wanted prices to be higher too.

"But we operate in a global market and what we are looking at . . . is our best estimate for the realities of where prices are," he said.

Looking ahead, Wilson said it was dangerous to predict what prices would do with any degree of certainty because of market volatility. It was dry in New Zealand and he expected production to be 3 per cent back on last season. Farm-gate milk prices were tumbling globally and that should see a tightening of global supply.

There was less growth in the northern hemisphere, supply was tightening in southern hemisphere but demand was is continuing to grow at normal levels, he said.

That meant potentially a more positive outlook for the new season.

"But it is very early days and we are only in February at the moment, and the board doesn't look at next year's numbers until May," he said.

Chief executive Theo Spierings said Fonterra was sticking to its strategy, with confidence in the long-term fundamentals of dairy demand.

"We will provide a full business update when we report our interim result on 25 March," he said. 

Fonterra buys milk from about 10,700 farmer shareholders, comprising about 90 per cent of New Zealand dairy farmers.

Farmer fortunes are tied to the amount of milk their cows produce and the amount the co-operative pays them for each kilogram of milksolids produced. The dairy co-operative also pays a dividend to farmers.

Fonterra's shareholders council, an independent farmer body that monitors Fonterra's farmer-controlled board, said it was encouraging that the milk price appeared to have halted its fall.

Council chairman Ian Brown said the announcement was a relief after farmers had experienced tough conditions throughout the country.

"It has also been encouraging to see GlobalDairyTrade, and in particular whole milk powder prices, increase significantly recently, and given what took place late last year it will go some way to building confidence on farm," Brown said.

In December, Fonterra reduced its forecast payout for the 2014-15 season from $5.30/kg to $4.70/kg. Combined with its estimated dividend of 25c to 35c a share, that meant a forecast cash payout of $4.95 to $5.05 for farmers. The cut came on the back of a slump in prices at the company's GlobalDairyTrade auctions but they have recovered in recent weeks.

Brown said farmers would be looking with great interest when the forecast dividend was announced at the interim results.

"Our farmers will want to see the strategy - which is key to adding value long term - deliver a return relative to the significant investment they have made and continue to make in their co-op."

 - Stuff

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