Fonterra signals $2.2b dairy payout cut

RICHARD MEADOWS
Last updated 11:08 28/05/2014

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Dairy farmers are in for a $2.2 billion pay cut next year, but economists see the glass as half full, with prices still near record highs.

Fonterra has forecast a reduced farm-gate milk price of $7 a kilogram of milksolids next season, and has cut this season's forecast from $8.65 to $8.40.

The dividend is 10 cents a share, meaning the full payout for a shared-up farmer is $8.50/kg.

This record payout equates to $13.4b this year (excluding dividends), dropping to $11.2b next year, based on last season's production of 1.6 billion kg of milksolids.

The drop will be mitigated slightly by a higher forecast milk supply of 1.62 billion kg of milksolids for the new season.

Fonterra chief financial officer Lukas Paravicini said farmers would be pleased with this year's prices and the guidance for next season.

"They know they have to take that with caution, because it's an opening price," he said. "But they will be very upbeat, I believe, with that price."

Farmers would not find out their full cash payout, which includes the contentious dividend payment for investors, until July.

"We will have the final business plan for the next three years approved by the board in the next two months," Paravicini said.

He would not confirm or deny the prospect of paying no dividend at all, but said he did not "see the rationale behind that".

The cuts come after prices at the dairy giant's global auction fell 23 per cent since February.

Paravicini said it was only "a matter of time" before demand for milk powder in China picked up again after short-term volatility.

New Zealand's dollar has also been a factor, remaining high against the US dollar despite the drop in dairy prices. The Kiwi was trading at US85.42c this morning, jumping to US85.65c on the news before retracing slightly.

The forecast was in line with bank economists' expectations, although some had warned prices could start below $7 if the dollar remained high.

Fonterra chief executive Theo Spierings said dairy commodity prices had come off the peak reached in early February as global supply and demand rebalanced.

"There is currently more milk available for the international market to absorb," he said.

"We expect demand from China to remain strong. In Russia, there will be pressure on the balance between imports and local production."

This season Fonterra's 10,500 farmer-shareholders will earn an annual profit of $3500 per hectare (including dividend), which is close to three times the average over the last seven years.

ANZ chief economist Cameron Bagrie saw the forecast as "glass half full", with the decline to $7, sans dividend, still the fourth-highest payout on record.

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On a historical basis a milk price above $7/kg MS was very good, and ensured decent profitability around the $2000/ha mark for the average dairy farmer, he said.

There was a stellar productivity story behind the numbers, with the average yield per cow at a new record close to 381/kg MS, Bagrie said.

It is possible, but unlikely that the price cut will lead to lower milk and dairy prices on supermarket shelves.

"You can assume that where there's an input price change, there will at some stage be a retail price modification," Paravicini said.

However, he pointed out that recent price increases had been absorbed rather than passed on to consumers.

Retailers were independent from Fonterra and set prices at their own discretion, Paravicini said.

- Stuff

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