May 23, 2012

Fonterra announces lower 2012-13 payout as dairy prices fall

As global dairy prices stumble, Fonterra Co-Operative Group Ltd cut its forecast payout for its farmer shareholders for this season and announced a lower 2012-13 payout but is tipping a price recovery as early as August, it said Tuesday (May 22).

Dairy prices in the twice monthly GlobalDairyTrade auctions have fallen 41% from a March 2011 peak and are down 24% so far this year. The GlobalDairyTrade auction is an international trading platform established by Fonterra and managed by Boston-based CRA International.

"I do expect to see the first sign of recovery in dairy prices in August-September," Fonterra Chief Executive Theo Spierings told Dow Jones Newswires in an interview.

Spierings said spot-market prices in the US and Europe are extremely low and "people will have to dry cows. Supply in the US and Europe will come down fast," he said. He also noted that New Zealand is entering the winter season, when milk production dries up naturally.

The revised payout range for the season ending May 31, 2012, is now NZD6.45-6.55 (US$4.94-5.02) a share before retentions, comprising a lower Fonterra farm gate milk price of NZD6.05 (US$4.54) a kilogramme of milk solids, down from the prior forecast of NZD6.35 (US$4.77).

Fonterra, which produces about a third of the world's traded dairy products, announced an opening payout forecast for the season ending May 31, 2013, in a range of NZD5.95-6.05 (US$4.46-4.54) before retentions, comprising an opening forecast farm gate milk price of NZD5.50 (US$4.13) a kilogramme of milk solids.

The lower payout in the current 2011-12 season means Fonterra's 10,500 farmer shareholders will receive around NZD1.7 billion (US$1.3 billion) less than they did in the prior season, according to BNZ Economist Doug Steel.

Spierings underscored demand in China, Asia, the Middle East and North Africa is still strong. He noted only 8% of total milk supply is globally traded, so "if there is a shift in supply and still strong demand, then a correction will take place."

According to Spierings the correction will be fast when it happens. He said, however, it was unlikely that the payout for the year to May 31, 2013, would be any higher given that 80% of its milk is subject to contracts.

Spierings reiterated that he expects Fonterra's full-year revenues to be "in the NZD20 billion (US$15 billion)" for the year ended July 31, 2012.