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Fonterra cuts forecast 2009 payout as world prices fall

Friday 21st November 2008

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Fonterra Cooperative Group, the world's biggest exporter of dairy products, cut its forecast payment to farmers after a 24% slide in global prices for dairy products in the past eight weeks and the prospects of a write-off of San Lu.

The revised forecast is for $6 a kilogram of milk solids for the 2008/2009 season, down 60 cents from the previous estimate in September, the cooperative said in a statement.

Dairy prices have joined a broad downturn in commodities on speculation the slowing global economy needs less raw materials, fuel and food. Crude oil dropped below US$50 a barrel for the first time in two year in New York. The weakening global outlook means demand probably won't recover in mid-2009 as earlier expected, chief executive Andrew Ferrier said today.

"While the medium to long term outlook for dairy remains positive, the financial crisis has driven commodity prices down further and, with consumer confidence deteriorating, it is likely that prices will remain weak, rather than recover, through our fiscal year," he said.

Slowing global growth has led to a build up of surplus stocks of commodities in the US and the EU and "a rebalancing is unlikely in the short term," Ferrier said.

The reduced payment comes in a year when Fonterra's ambitions to expand into fast-growing China and leverage a manufacturing base there to supply global trade were thwarted by the debacle at San Lu after melamine in the company's milk products killed four babies and sickened many more.

Fonterra has already taken a $139 million impairment charge to cover the cost of the product recall and anticipated loss of brand value, reducing the value of its 43% stake in San Lu to $62 million. Today it said a full write-off of the investment was likely because any sale of San Lu assets would go toward meeting its liabilities.

By Jonathan Underhill

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