Fonterra slashes milk payment forecast as prices tumble

Wednesday 28th January 2009

Fonterra Cooperative Group, the world's biggest exporter of dairy products, slashed its forecast milk payments to farmers because of a drop in world prices.

The revised payout forecast for the 2008-2009 season will be $5.10 per kilogram of milk solids, down from the $6 a kilogram predicted in November and 35% below the record $7.90 that Fonterra paid last season.

The 90 cents cut would amount to a $1.1 billion reduction in payments to farmers for the current season, based on the 1,192 million kilograms of milksolids collected in the previous season. The reduced payments means farmers will have less cash in their pockets to spend and likely will add to the drag on the domestic economy, in its first recession in a decade.

"It's clear now that the financial crisis is hitting the global economy hard and dairy has been impacted along with most other commodities," chairman Henry van der Heyden said.

"We are now taking a much more pessimistic view that we were at the end of last year."

Total payments to farmers will sink to about $6 billion for the current season, from $9.4 billion last season. In addition, Fonterra will delay part of the payment typically made in April so that farmers receive all of the funds in October, once the annual payout is finalised, rather than in two tranches.

"The devil for supplier shareholders comes with them effectively bankrolling Fonterra for some five months, in the case of the advance payout and six months, for the value return component," said Lachlan McKenzie, Federated Farmers Dairy chairman. "A large chunk of the half billion dollars farmers would have budgeted for in April has now gone."

He described the payout cut itself as "tough but manageable for well run farm businesses" and said the fundamentals for dairy "remain extremely good so while this revision is disappointing, it is not a calamity."

Prices for dairy products have dropped more than 50% from their record levels of late 2007. Prices may fall further after the European Union this month re-started export subsidies for its dairy farmers after dropping the aid in 2007 to meet undertakings under world trade talks.

"Any regional subsidies or intervention had the potential to distort the market, potentially delaying recovery to more sustainable levels," Fonterra chief executive Andrew Ferrier said today.

Shares of PGG Wrightson, the biggest rural services company on the NZX 50 Index, pared an earlier gain to be unchanged at $1.23. The New Zealand dollar recently traded at 52.79 U.S. cents from 52.88 cents earlier today.

The average price of milk powder fell 9.3% in Fonterra's online auction to US$2,017 per metric ton this month, more than 50% lower than when the auctions began in July last year. Dairy products accounted for 22% of New Zealand's $42.5 billion of exports in the 12 months ended Oct. 31. The Reuters Jeffries CRB index, a broad measure of the price of raw materials, fell 2.7% as demand for commodities eased.

"The dairy pay-out is linked to New Zealand's growth - it's similar to a fall in commodity prices" in that by taking money away from exporters, it reduces demand for the kiwi, said Danica Hampton, currency strategist at Bank of New Zealand.

The $5.10 a kilogram payment is made up of $4.65 for milk and a so-called value return of 45 cents.

"The macro-economic outlook and dynamics within global dairy markets suggest the industry is in for a difficult 12 to 18 months," Ferrier said.

By Jonathan Underhill

Comments from our readers

No comments yet