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Fonterra maintains forecast for stronger 2018 payout despite weaker dairy prices

Thursday 2nd November 2017

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Fonterra Cooperative Group has maintained its forecast for a stronger payout to its farmers for the 2018 season despite the recent decline in dairy prices on the GlobalDairyTrade platform.

In presentations for the annual shareholders' meeting in Hawera this morning, the cooperative reiterated its forecast 2017/18 payout of $6.75 per kilogram of milk solids plus earnings per share in a range of 45-to-55 cents, making the forecast total available payout of $7.20 to $7.30, before retentions. The final cash payout was $6.52 for the 2016/17 season for a 100 percent share-backed farmer.

Chair John Wilson said farmers enjoyed a good season in 2016/17 "after two seasons of unusually low milk prices". Apart from that, the company presentations gave few specifics on the outlook.

Some analysts have been speculating the 2018 forecasts could be under pressure given the recent weakening in prices. Whole milk powder fell 0.5 percent to US$3,014 a tonne in the last GDT auction on Oct. 17, the lowest since the April 17 sale.

OMF said last month that global supply/demand dynamics "suggest scope for a further significant correction in the milk fat premium and we see potential for considerable downside risk to the farmgate milk price." 

The presentations from chief executive Theo Spierings included bullet points for 2018 priorities that include "Deliver China and Beingmate partnership at full potential", protecting Fonterra's share of the New Zealand milk pool, revitalising the Anlene brand, increasing its share of the Australian milk pool and achieving "double-digit Foodservice diversified growth."

Fonterra has faced criticism for its partnership with Beingmate, whose shares have fallen since the New Zealand company took a stake of just under 20 percent in 2014 to cement a deal targeting China's infant formula market and sales of its Anmum products.

In Australia, Fonterra competes with Murray Goulburn Cooperative, that country's largest milk processor. While it has won suppliers off its rival by being able to offer a higher milk payout it missed out on buying Murray Goulburn, which last week announced it had entered a binding agreement to sell all its operating assets and liabilities to Canada's Saputo for A$1.31 billion.

Duncan Coull, chair of the Fonterra Shareholders' Council, was also set to address the meeting. His presentation included a chart rating the company against its key performance indicators for 2017. He gave it ticks for the farmgate milk price, consumer and food service volumes and the farmgate milk price but gave it a fail for earnings per share, which at 46 cents lagged behind the 50 cents-to-60 cents target, and return on capital, which came in at 11.1 percent versus a targeted 13.2 percent.

Last month, Fonterra trimmed its milk collection outlook for the 2018 season after a wet August and September sapped production, especially in the North Island. It now forecasts 1,540 million kilograms of milk solids for the year ending May 31, 2018 from a previous projection of 1,575 kgMS.

Units of the Fonterra Shareholders' Fund, which are entitled to the dividends on the ordinary shares, last traded at $6.40 and have gained 6.7 percent this year, while the S&P/NZX 50 Index rose 17 percent.


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