'Abnormal' situation hits Fonterra

TIM HUNTER
Last updated 10:05 11/12/2013

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An ''extraordinary situation'' in the dairy market has forced Fonterra to hold its milk price forecast at $8.30 a kg of milk solids, despite soaring demand.

The giant co-operative also announced a huge drop in its 2014 dividend forecast to 10c a share, down from 32c previously.

Chairman John Wilson said milk powders were selling at high prices because of the strong global demand and limited supply, but "only four months into the season, we are in an extraordinary situation''.

While milk powders were fetching high prices, 30 per cent of milk production was used for cheese and casein products, which were in less demand.

"In such abnormal circumstances, the board has the discretion to pay a lower Farmgate Milk Price than that specified under the [milk price] manual, if it is in the best interests of the Co-operative,'' said Wilson.

"Today's forecast is our best estimate, but given the current volatility it may change over the course of the season. As a result of this volatility, the board has also lowered the dividend forecast for the 2014 financial year to 10 cents per share."

The new forecast payout is well below the $9 a kg that would have been paid if the milk price manual had been strictly followed.

CEO Theo Spierings said "Doing nothing, and forecasting a Farmgate Milk Price that is higher than we can afford to pay at this stage in the season, is not an option.

"We will maintain our financial discipline and not pay the Milk Price out of borrowings - particularly in a year when we are forecasting a record payout for our farmers."

Fonterra Shareholders' Council Chairman, Ian Brown said today's announcement was a practical decision given the unusual market conditions.

"I have had discussions with the chairman of the board, John Wilson and it has been made clear that there is a significant gulf between the higher price the market is paying for Whole Milk Powder (WMP) and the price paid for Fonterra's other products such as cheese and casein,'' Brown said.

"While the Milk Price Panel recommended a price of $9 per kg/MS this is not the price Fonterra is being paid for its cumulative product mix."

Brown said that WMP is a lead indicator of the Farmgate Milk Price and comprises around 70 per cent of Fonterra's product mix whereas the other products which make up the remaining 30 per cent have less bearing on the Milk Price.

"This has resulted in strong upward pressure on the Farmgate Milk Price which if Fonterra was to follow would cause an unacceptable increase in debt and gearing," he said.

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"While it is unusual for the Board not to follow the Milk Price Panel's recommendations, they are duty bound to act in the best interests of the Co-op and make appropriate decisions with this in mind.

"The forecast Milk Price of $8.30 is still a record and with the 30 cent increase in the December advance rate payout to $5.80 Farmers can continue to feel positive about the outlook for the season.

"Fonterra is working to manage potential risk based on the signals it is receiving, as we do on farm.

"As we know our industry is a volatile one and the dividend announcement, while significant, has come only four months into a season during which the high Milk Price has made it apparent that it will be a tough year in terms of profitability, particularly for the consumer business.

Alongside the payout announcement, Fonterra said it was investing $235 million in a new processing plant at its Pahiatua site in the Manawatu. The new drier will enable the co-op to process an additional 2.4 million litres each day.

The move follows controversy over excess buttermilk dumped by Fonterra at waste sites in Eltham in Taranaki and Atiamuri near Taupo.

Fonterra director of operations and logistics, Robert Spurway, has also confirmed the company is discharging excess by-product into the sea off Hawera, in Taranaki.

While high milk prices benefit dairy farmers, they lead to lower profits for Fonterra itself and reduce its headroom to pay dividends.

With investors in the NZX-listed Fonterra Shareholders Fund able to access only the dividend stream, there was concern among some farmers that Fonterra was could harm the co-op if it had kept its dividend at 32c in the face of falling profits.

"The dividend should be a true dividend," South Canterbury farmer David Ellis said last month.

"I would think it's quite alarming that they would use our balance sheet to top up the dividend - it's not a true result of the company."

In September, Fonterra had forecast a 2014 dividend of 32 cents a share, matching this year, although profits were likely to be hit by high milk prices. "Fonterra can draw upon its balance sheet and cashflow performance to support the estimated dividend, " it said.

One farmer, who asked not to be named, said Fonterra was right to restrain the milk payout but was surprised the dividend was still 10c.

''If 70c is coming off the milk price, the dividend must be slaughtered,'' he said. ''[Shareholders fund] unitholders must be distraught.''

- © Fairfax NZ News

- © Fairfax NZ News

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