Fonterra cuts forecast payout 25 cents as European milk supply floods global market

Tuesday 8th March 2016

Fonterra Cooperative Group cut its forecast payout to farmers for a second time this year, citing Europe's continuing supply for depressing global prices.

The world's biggest dairy exporter expects to pay $3.90 per kilogram of milk solids in the current season, down from a previous forecast of $4.15/kgMS, it said in a statement. That's below industry body Dairy NZ's estimate of $5.25/kgMS as the level needed by the average farmer to break even, and just 5 cents higher than Fonterra's first forecast for the season when the cooperative rolled out interest-free loans to its supplier-shareholders to help them through the season.

"The time frame for a rebalancing has moved out and largely depends on production reducing - particularly in Europe - in response to these unsustainably low global dairy prices," chief executive Theo Spierings said. "Our forecast is based on no significant changes to either supply or demand globally before the end of the year. However, a reduction in the supply available before then could mean prices recover earlier than currently expected."

Dairy prices have declined in all but one of Fonterra's GlobalDairyTrade auctions this year as global production continued to expand, helping build up stocks around the world.

Fonterra expects its own milk production to be at least 4 percent lower than the previous season, with local farmers culling herds and reducing supplementary feed.

Chairman John Wilson said the cooperative's management is focused on stripping out costs "and our balance sheet strength will provide opportunities to support our farmers' cash flows."

Fonterra's credit rating was cut last year after it racked up debt to take a cornerstone stake in Chinese processor Beingmate Baby & Child Food Co and offered its farmer shareholders interest-free loans to tide them through a downturn, while at the same time contending with the slump in global dairy prices.

The dairy processor affirmed forecast earnings per share of between 45 cents and 55 cents, equating to a forecast cash payout of $4.25-$4.30/kgMS for a fully shared-up farmer after retentions.

BusinessDesk.co.nz

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