22 May 2012

Fonterra lowers milk price forecasts

9:47 pm on 22 May 2012

Fonterra has reduced its milk price forecasts in response to a continuing decline in world dairy prices.

The dairy cooperative on Tuesday announced a 30 cent reduction in its forecast farm gate milk price for the current season to $6.05 per kilogram of milk solids.

No change has been made to the dividend forecast, which stays at 40 cents to 50 cents a share.

Fonterra also announced a lower opening forecast payout for the next season, starting in June. It set the milk price at $5.50 per kilogram, with a forecast profit range of 45 cents to 55 cents per share.

Fonterra says that reflects expected higher dairy production around the world flowing through to lower international dairy prices.

Federated Farmers estimates the cut to this season's payout alone will strip farmers of $500 million of income.

The global dairy trade index has fallen by more than one-fifth since Fonterra's last forecast in April.

Fonterra chief executive Theo Spierings says at present, the co-operative is picking that next season's payout will be the lowest since the 2008/09 season when the global financial crisis was at its worst.

Mr Spierings says a surge in dairy production has led to a collapse in global prices, forcing the cut in this season's payout. He says the forecast for next season is based on a recovery in prices by August this year, but admits more downside risk to that forecast than upside and says the payout could be lower.

Fonterra chairman Sir Henry van der Heyden believes the opening forecast for 2012/13 is realistic, saying supply and demand should move more into balance later this year which may help ease downward pressure on prices.

However, he says there is no consensus among outside experts on how soon prices may recover, so Fonterra is giving farmers its best possible estimates so they can plan accordingly.

Fonterra also set the fair value share price for the 2012/13 season at $4.52 per share - the same level as in the current season.

Radio New Zealand's economics correspondent says the reduction represents a drop of $70,000 for the average dairy farm and a decrease in income for New Zealand as a whole of $440 million, relative to its earlier forecast.

BNZ economist Doug Steel estimates the cut will mean $1.3 billion in lost revenue to Fonterra's suppliers.

The New Zealand dollar rose slightly after the announcement on Tuesday.