25 Sep 2015

Fonterra takes cautious approach to payout

12:18 pm on 25 September 2015

Milk prices are expected to rise further before the end of the year but Fonterra is sticking with its conservative forecast payout for now, the co-operative's chairman says.

Dairy cow.

Dairy cow. Photo: SUPPLIED

Fonterra has nearly tripled its net profit to $506 million and raised its forecast milk price from $3.85 to $4.60 a kilo of milk solids after a recent surge in global dairy prices.

Farmers said the figure was still below the break-even point and the milk price needed to be closer to $6 before they make money.

Chairman John Wilson said lower production was pushing prices higher but Fonterra was not raising its forecast yet.

"Our current forecast is $4.60 as we see any change we will update our farmers. We have said all the way along that these prices are unsustainable and we would expect them to come back up into that point over the next three to six months but that is not part of our current forecast."

He told Nine to Noon the harsh reality was that farmers were not going to be able to fully mitigate volatility, which looks like it is here to stay.

"If you go back ... pre-2007 volatility was around about 30 percent year on year. Today it's 60 percent and increasing - so huge volatility. Farmers carry all the risk of commodity and FX risk, that is the reality for farming in New Zealand."

John Wilson (centre).

John Wilson (centre). Photo: RNZ / Diego Opatowski

He said farmers should be doing everything they can to get their businesses set up to be able to handle sudden shifts.

"Because regardless of what Fonterra does, that risk will still be carried on farms for all of the foreseeable future. But to strategy - it is about how we put more products into specialty ingredients and more importantly consumer and food service.

"If you look at the volume growth that we've had over the last year, and if you look at the numbers the majority of that growth is actually flowing through to consumer and food service so we're getting far greater growth on a relative volume basis into consumer and food service than we are into core commodity and ingredients."

John Wilson said the restructuring project, which will result in the loss of at least 750 jobs, was the biggest transformation of Fonterra since it was formed.

He said it was being driven by a need to be more efficient.

"But more importantly it's about how we act very very quickly, more agility to deal with this commodity volatility ...and release a lot more working capital out of the business."

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