September 25, 2014

 

Fonterra expects lower payout to New Zealand dairy farmers

 

 

A forecast by Fonterra Co-Operative Group is expecting lower payouts to New Zealand's dairy farmers for the current season, with an estimated loss of about US$4.5 billion.

 

Fonterra states that it may pay its 10,500 farmer shareholders an amount of US$4.21/kg of milk solids in the season, which began on June 1. A previous forecast sees a payment of US$5.42/kg.

 

The dairy company also reported a sharp drop in full-year net profit, despite record-high revenue of US$18 billion. Net profit in the year ending July 31 dropped to US$142.5 million from US$586 million in the prior year. According to Fonterra's chief executive, Theo Spierings, while the company had increased its prices, the action did not fully offset higher costs.

 

On a positive note, production is progressing fast in the current season, the chief executive noted. "We will look at growth but whether it will be 8% growth like last year is a big question," Spierings said. He also expressed significant difficulty for Fonterra to reach a similar revenue level in the current year due to the lower milk prices.

 

Dairy prices have come under immense pressure in recent months, falling more than 45% from a peak in February, largely due to a sharp decline in demand from China, which had until recently been building up stockpiles of milk powder from New Zealand.

 

Declining prices could mean a further cut in the payout forecast, Fonterra cautioned.

 

"Under the current market conditions, there is further downside risk. However, the forecast reflects expectations that prices will increase in the medium term", said Fonterra's chairman, John Wilson.

 

Whole milk powder prices will have to recover to US$3,500 per tonne by March 2015 for the cooperative to be able to reach the US$4.80 payout, according to Spierings. The average winning price for whole milk powder in the latest GlobalDairyTrade auction was US$2,692/tonne, just over half what it was in February.

 

Spierings noted that the whole milk powder price rose 0.6% at last week's auction, despite significant volumes on offer, and said bidding ratios have been strong.

 

Meanwhile, economists provide less than favourable expectations.

 

"Unless there is a reasonably sharp near-term recovery in dairy auction prices, even a US$4.51/kg payout is difficult to achieve," Chris Green, a First NZ Capital economist, explained.