April 2, 2007

 

Fonterra may increase 2008 milk payout due to increased prices
 

 

New Zealand-based Fonterra Cooperative Group Ltd., the world's biggest dairy exporter, may increase payments to its farmer suppliers in 2008 as all-time high prices have hit dairy products globally.

 

The increased in demand and a drought in Australia, the world's third-largest exporter, have pushed prices for cheese and milk powder to records. A decline in prices is unlikely and this projection allows the Auckland-based cooperative to pay more for milk in the year ending May 31, 2008, said company Chairman Henry van der Heyden. 

 

He said next years' payout is seen to close at NZ$5 than NZ$4 a kilogramme with prices staying relatively firm.

 

World dairy prices rose 46 percent the past six months and are 32 percent higher than the previous record set in August 2005, based on a Commonwealth Bank of Australia Ltd. index of US dollar prices. The surge in prices reflects a "significant'' shortage in some markets, Fonterra Chief Executive Officer Andrew Ferrier said today.

 

Fonterra accounts for about 40 percent of the international trade in dairy products. It sells more than NZ$$8 billion of yogurt, butter, cheese, and snack foods in 140 countries under brand names Anchor, Fernleaf and Anlene brands, making it the world's fifth largest dairy company by sales.

 

Fonterra paid the 11,000 farmers who supply its milk NZ$4.96 billion, or NZ$4.10 a kilogram, last year. It is forecasting a payout of NZ$4.15 for the year ending May 31.

 

Gains in dairy product prices have outpaced a rise in New Zealand's dollar, which typically erodes the value of Fonterra's export earnings.

 

Skim milk prices are currently about NZ$3,500 a tonne, which is probably unsustainable, Ferrier said. Still, a recent slide in the US dollar and forecast annual global demand growth of 2.7 percent through 2014, will keep prices well-supported.

 

The higher payout will help sustain the progress of New Zealand's dairy industry, where a combination of rising land prices and interest rates threaten Fonterra's goal of keeping the country as the world's largest, low-cost milk producer. A 50 percent, four- year rise in the price of shares farmers to supply Fonterra or increase their output is also contributing to rising costs and prompting some to shift to rivals.

 

While there is no short-term risk to Fonterra's milk supply, there are tensions in the company's capital structure that should be addressed, van der Heyden said. Fonterra is likely to invest as much as NZ$3 billion worldwide during the next five years and it needs to have a financial structure that will help maintain growth beyond and provide the wider range of investment choices for farmers.

 

After a similar review three years ago, Fonterra decided against selling its consumer foods division, or issuing shares in the unit to its shareholders. It has resisted calls for public trading in its shares, though it has opted to buy milk under contract from non-shareholders to maintain growth and encourage increased production.

 

Fonterra's board will spend the next six months assessing options and won't discuss them again publicly until it has a preferred option to put to shareholders at their annual meeting in September, van der Heyden said.

 

Farmer-control of the company must be maintained and its cooperative structure will also be a "very solid part" of any new model adopted, he said.