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Fonterra's payout may be at risk after global dairy prices undershoot

Wednesday 4th October 2017

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Dairy prices undershot expectations in the overnight auction and some economists say it points to weaker demand and stronger supply, threatening Fonterra Cooperative Group's forecast payout. 

The NZX Dairy Derivatives market pointed to around a 5 percent lift but instead the GDT price index - which covers a variety of products and contract periods -  fell 2.4 percent from the previous auction two weeks ago to US$3,223. 

"The fall was a surprise and must be telling us something about demand that the market did not already know," said Westpac Banking Corp chief economist Dominick Stephens. The futures were likely to be a reflection of Fonterra’s September Global Dairy Update suggesting poor weather conditions are hampering milk collections, which on a seasonally adjusted basis are down, he said. However, the result "suggests that global dairy demand may not be a robust as thought." 

The weak demand could crimp dairy giant Fonterra's forecast payout for farmer shareholders. Stephens expects Fonterra to pay $6.50 per kilo of milk solids in the current seasons versus Fonterra's forecast of $6.75//kgMS. Fonterra reiterated its forecast at its annual result last week. 

ANZ Bank New Zealand rural economist Con Williams also said the result disappointed and "really confirms that the only thing that has been holding WMP (whole milk powder) and butter prices up recently was short New Zealand supplies".

"While Chinese demand has been solid, it hasn't been spectacular," he said. Other Asian and Middle Eastern buyers have stepped in, but have struggled to absorb the higher GDT supply, Williams said.

The market also appears to be banking on a rebound in New Zealand supply - despite the poor weather, he said. While pasture conditions remain "very sodden" in the North Island they are generally better in the South Island, Williams said. 

Also "last year’s poor performance through the seasonal peak for milk production would appear difficult to repeat," he said. Softer New Zealand production could still see a milk price of $6.75/kgMS, "but if not, it seems something around the mid-$6/kgMS is more likely."  

ASB Bank chief economist Nick Tuffley was more optimistic about prices and said "overall we are expecting production growth to be held back by the bad weather we have been experiencing. We expect to see that eventually translate into the auction prices over time," he said.

ASB has expected production to increase 4 percent versus the prior season and is now tipping a 2 percent increase "with a question mark over that if we don't see weather conditions improve," he said. 

Regarding the discrepancy between the futures market and the outcome, Tuffley said it was in line with recent results and "within the volatility we see from one auction to the next." ASB is still expecting Fonterra to pay $6.75/kgMS. 

(BusinessDesk)



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