Fonterra tips milk price of up to $8, says market volatility is a threat

Tuesday 25th May 2010

Fonterra Cooperative Group, the world’s biggest dairy exporter, boosted its forecast for next season’s pay-out to farmers, though it warned market volatility could erode the surge in milk prices this year.

Chairman Henry van der Heyden said Fonterra’s board lifted the opening milk price forecast 50 cents to $6.60 per kilogram of milk solids (kgMS), and 30 to 50 cents per share of forecast distributable profit. Van der Heyden said if international dairy prices and foreign exchange rates stayed at today’s level, the pay-out could be in excess of $8.00 per kgMS.

“That’s what the market looks like right now, but we know that there is substantial volatility in the market,” van der Heyden said in a statement. “The reality is that we are seeing big swings in foreign currencies and turmoil in some economies. These factors could have a big impact on demand for dairy products and the prices we ultimately realise.”

Milk prices on Fonterra’s online trading platform, globalDairyTrade, have more than doubled from last year’s trough in July, and have underpinned the recovery in New Zealand’s economy with bigger than expected export receipts.

Kevin Wilson, rural economist at ANZ New Zealand, said the forecast beat market expectations, and while Fonterra will already have a portion of next season’s profit covered, it was still 15 months away from the pay-out to farmers.

“It’s a very good forecast – better than anyone might have expected,” Wilson said. “The question is where the gains are coming from – consumption price or exchange rate? Both are important.”

Mike Jones, strategist at Bank of New Zealand, said prices for New Zealand’s raw materials are holding up well, and have helped push currency traders to the kiwi dollar from its Australian counterpart. The kiwi jumped to 81.50 Australian cents from 81.25 cents immediately before the Fonterra announcement.

“Sentiment for the kiwi economy is attracting attention with commodity prices being factored in on the Aussie cross-rate,” Jones said. “I wouldn’t be surprised if it rallies to 82 or 83 cents over the coming weeks.”

Gains in the kiwi against the greenback were limited as safe-haven demand underpinned support for the US dollar.

The kiwi was little changed at 67.01 US cents from 66.94 cents immediately before the announcement, after rising as high as 67.20 cents.

Fonterra chief executive Andrew Ferrier said the $6.60 forecast was based on a favourable outlook for dairy pricing, with strong growth in consumption and demand in Asia, the Middle East and North Africa.

“Global supply remains constrained, with production down because of adverse weather in Europe and Australia, while tight credit conditions are constraining dairy growth in the United States,” he said in a statement.

Fonterra’s van der Heyden said the cooperative was on track to deliver this season’s payment of $6.10 per kgMS and a distributable profit of 40 cents to 50 cents per share.

New Zealand exports of milk powder, butter and cheese surged 19% to $969 million in March from the same month a year earlier, though casein and caseinates slumped 37% to $61 million over the same period.

Dairy products account for some 23% of New Zealand’s $39.5 billion worth of exports.

Businesswire.co.nz

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