Fonterra cuts Australian farmgate milk price, offers loan to farmers

Thursday 5th May 2016

Fonterra Cooperative Group cut its forecast farmgate milk price to its Australian dairy farmers for the current season, saying it better reflects the oversupply of milk which is weighing on global dairy commodity prices. It also offered farmers a loan linked to future supply.

The dairy processor will pay its Australian farmers A$5 per kilogram of milk solids, down from an earlier forecast of A$5.60/kgMS, the Auckland-based company said in a statement. It also offered its Australian suppliers an interest-bearing support loan of as much as 60 cents/kgMS, linked to a supply commitment and repayable from its 2018 financial year.

"The price change better reflects the reality of the supply and demand imbalance that is affecting global dairy commodity prices, compounded by the recent strength of the Australian dollar," it said.

Fonterra, New Zealand's dominant milk processor, is reducing payments to its farmer suppliers as it grapples with weak dairy prices which have remained lower for longer than expected as global supply continues to exceed demand. It has already reduced payments to its New Zealand suppliers to $3.90/kgMS for the current season, which is below the cost of production for most. It has supported its cash-strapped farmers with an interest-free loan scheme that cost it $390 million and stretched its balance sheet, and has brought forward payment of its final dividend to get money into farmers' hands as quickly as possible.

The company said today that its revised Australian milk price would reduce the cost of goods sold for Fonterra Australia by about A$48 million, although the final amount is subject to factors such as final milk volumes for the year.

"This will contribute to the reduction of operating losses in our Australian Ingredients business this financial year," it said. The move follows last week's sudden resignation by the chief executive of a competitor coop, Murray Goulburn, and a cut in its promised payout to farmers from A$6/kgMS to A$4.75 to A$5/kgMS.

Australian operations have been under-performing for some time, prompting a turnaround plan, which included the sale of Fonterra's stake in Bega Cheese, a deal with Bellamy's Australia to make infant formula, and the merger of New Zealand's consumer brands with the Australian segment under the purview of Oceania managing director Judith Swales.

Fonterra maintained its current earnings guidance range of 45 cents to 55 cents per share.

Units of the Fonterra Shareholders' Fund slid 0.2 percent to $5.79, and have decreased 3.2 percent this year.

BusinessDesk.co.nz

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