November 9, 2011


Dairy payout to curb Europe's financial crisis



Fonterra chairman, Sir Henry van der Heyden, surprised the market last month by cutting NZ$0.45 (US$0.36) per kilogramme of milk solids off its NZ$6.75 (US$5.36) per kilogramme of milk solids payout forecast for 2011 to 2012, in a bid to ease commodity prices and boost the New Zealand dollar. 


The cut that amounted to NZ$700million (US$556million) aims to lift Europe from the prevailing financial crisis.


Since then, fears of a second global financial crisis have escalated with Greece's threatened default. The average price on Fonterra's latest online global auction also dipped slightly.


But van der Heyden said demand for dairy products from Fonterra's developing markets such as China should be a bulwark.


"We are still seeing pretty robust demand out of developing countries. Our business is more reliant on markets like Asia and the Middle East than Europe. We have less and less product going into Europe."


Bank of New Zealand economist, Doug Steel, said that, while "uncertainty" seemed to be the catchword for 2011, he did not read too much into a 1.2% average price easing on Fonterra's auction last week.


"It was well within the usual volatility auction-to-auction ... I get the sense international dairy prices are stabilising or have stabilised in the last few auctions."That's not to say it will remain like that."


ANZ National bank chief economist, Cameron Bagrie, said Fonterra had taken some of the cream off the payout "but that still leaves a fair bit of froth".


He said a tight supply of food commodities on world markets was supporting prices and all New Zealanders could do was "watch, worry and wait".


"The issue at the moment is the risk profile. New Zealand needs to be very mindful of what's going on globally."


Van der Heyden conceded continuing global financial uncertainty could spook commodity markets, but he believed demand for product from markets such as China would offset the risk.


"There is nervousness and uncertainty but we are still seeing underlying growth on top of that. I don't think that is going to change."


Fonterra was about 40% of the way through a bumper 2011 to 2012 production season.


On currency hedging policy, he said Fonterra "had a direction of travel" but was not fully locked into an exchange rate yet.


And then we have some forward contracts but they are much shorter than they used to be because with the volatility you can't afford to be out of the money."


Steel said industrial commodity prices had eased a lot more than food commodity prices.


"[Dairy] Prices are showing at least some signs of stability and while we have had a big increase in supply it gives some encouragement that dairy markets are holding up better."


Steel said the Kiwi also had an insulating effect on payout.


Dairy prices were measured in US dollar terms and, if everything was to turn "pear-shaped", the Kiwi could be expected to drop with them.


Bagrie said the medium-term outlook for the New Zealand economy, particularly in the rural sector, looked "remarkably good - the best in 40 years".


He suspected it would take an "economic calamity" to generate the political will necessary in Europe to address what needed to be done which was fiscal consolidation.


"Meantime we have political populism when we need leadership over populism.


"We need group interest to dominate self-interest and what we are seeing at the moment unfortunately is self-interest."

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