November 12, 2014

Fonterra reduces milk price payout to US$4.17

New Zealand dairy giant Fonterra said it plans to pay its farmers a reduced payout of NZ$5.30 (US$4.17) per kilogramme of milk solids in the 2015 season and a dividend of 25-35 cents a share, for a total payment of NZ$5.55 to NZ$5.65 (US$4.37 to US$4.45). This year's payout was higher at $8.50 including a 10 cent dividend.

The Reserve Bank said in its financial stability report released Wednesday that while New Zealand's overall financial system remained sound, risks in the dairy sector has increased as reflected by Fonterra's reduced forecast payout to farmers because of plunging global milk prices.

"The forecast dairy payout for the coming season has been reduced significantly, and could result in rising loan defaults should the lower payout level persist," Reserve Bank of New Zealand deputy governor Grant Spencer said in a statement.

The Reserve Bank said it expects dairy prices to recover early next year due to growing Chinese demand, but pointed out the risk of protracted weakness if global supply keeps expanding or if China takes longer to resume its forward purchase.

It also said highly indebted farmers may experience negative cash flow because of the lower payout. Farmers used last year's high price to repay debt.

Fonterra's early announcement gives farmers time to manage down their costs, helping mitigate the threat posed by the dairy sector.