Fonterra keeps 2015/16 payout forecast unchanged, sees global prices improving

Thursday 10th December 2015

Fonterra Cooperative Group, the world’s largest dairy exporter, has maintained its forecast farmgate milk price of $4.60 per kilogram of milk solids for the 2015/16 season, banking on global dairy prices improving in the first half of next year.

It’s also decided against extending the cooperative farm support loan of 50 cents per share-backed kgMS beyond this month, the Auckland-based cooperative said in a statement. Along with the estimated dividend payout of 35 to 40 cents kg/MS, the total forecast payout is $4.95 to $5.00.

Fonterra is required to consider its forecast farmgate milk price every quarter as a condition of the Dairy Industry Restructuring Act (DIRA).

Chairman John Wilson said the board and management had looked out over the next nine months and based the stable forecast on the view that current, unsustainably low prices will continue to impact production levels globally.

“We support the consensus view in the market that an improvement will take place, but the market remains volatile. While there are signs of a recovery, particularly in China, we still need the imbalance between supply and demand to correct,” he said.

Current global dairy prices are still way below what's required to sustain the payout and DairyNZ has estimated the average farmer needs a payout of $5.40kg/MS to break even.

Wilson also said New Zealand milk volumes are expected to be down by at least 6 percent over the current season – 1 percent more than the board previously indicated.

In the United States, production is up by only 1 percent year to date and in the European Union farmers are continuing to push production, currently up 1 percent.

Wilson said the board had weighed up the forecast payout and the need for financial discipline from the cooperative and decided against extending the support loan for milk collected after Dec. 31. It will monitor conditions and assess the need to continue the support, which has cost $390 million to date for 75 percent of farmers, if market conditions change later in the season, he said.

“Farms typically produce 60 per cent of their milk in the first half, with production beginning to taper off from December, so we have provided support when it is needed the most,” he said.

Ratings agency Fitch said in a report yesterday that the cooperative support loan and higher than normal advance payments were the two key reasons behind its two notch ratings downgrade of the cooperative in October.

The Fonterra Shareholders' Fund, which gives holders rights to Fonterra's dividends, last traded at $5.75 apiece, and has shed 4.3 percent so far this year.

BusinessDesk.co.nz

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