August 2, 2013

Fonterra raises farmgate milk price forecast

 

 

 

For the 2013-14 season, Fonterra has revised its Farmgate Milk Price forecast of NZD7.50 (US$6) per kilogramme of milk solids, including NZD5.50 (US$4.37) advance, and an estimated dividend of NZD0.32/share (US$0.25).

 

Fonterra Shareholders' Council Chairman, Ian Brown says "It will allow Fonterra Farmers to improve their financial position, provide them with some added flexibility and enable them to move into the new season with confidence."

 

The world's largest dairy exporter also said that higher prices may sting its cost margins in the financial year beginning in August, prompting a 3% slide in the Fonterra Sharetrading Fund as the announcement followed a downward revision of its 2012-13 earnings forecast last week.

 

The cooperative, New Zealand's largest company, raised its forecast payout to shareholder farmers to NZD7.50 (US$6) per kilogramme of milk solids from an initial forecast before retentions of NZD7.00 (US$5.56), in line with market expectations for an upward revision.

 

With the addition of a NZD0.32 (US$0.25) forecast dividend, this would result in a final cash payout of NZD7.32 (US$5.81), a jump of roughly 20% from a forecast payout of NZD6.12 (US$4.86) for the 2012-13 financial year ending on Wednesday (Jul 24).

 

Analysts said the higher forecast would contribute an additional 1.6% to the country's nominal economy after factoring in a widely expected rise in production in the 2013-14 year. The dairy sector generates more than 7% of the country's GDP. The higher forecast comes as overall global dairy prices set at Fonterra's benchmark fortnightly auctions remain strong due to a fall in milk production during the northern hemisphere spring season.

 

In April, prices hit their highest level since the trading platform began around 2008, and have hovered near those levels since. A slide in the New Zealand dollar from a 20-month high versus the US dollar since April has also been positive for the country's dairy industry, as a historically strong currency has constrained demand for exports.

 

Analysts said that the higher forecast also reflected better-than-expected recovery from drought conditions in the country that sapped production earlier this year.

 

"We think New Zealand production can rebound quite strongly from the drought," said Westpac economist Nathan Penny, who had expected a forecast price of NZD7.40 (US$5.88).

 

He added that he saw the potential for the forecast price to rise further throughout the year if global dairy prices continue to rise, or if the New Zealand dollar pushes lower.

 

Fonterra added that higher global dairy prices would raise its costs to buy liquid milk from farmers to process into milk powder and other materials to export to countries including China, a major importer of milk powder.

 

"During the first half of FY14 we are likely to have to absorb some of the expected substantial increases in the cost of goods arising from current high commodity prices, and this could have an impact on margins," CEO Theo Spierings said in a statement.

 

Fonterra is preparing to enter China's booming branded infant formula market later this year. Earlier this month, it cut the price of its Anmum brand of maternal milk products sold in the country as Beijing reigns in sky-high prices for formula products.