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Fonterra raises payout forecast to NZ$6.05/kg (Update 2)
November 9th, 2009
Fonterra has raised its forecast payout for the 2009/10 year to NZ$6.05 per kg of milksolids from its previous forecast of NZ$5.10/kg, citing an improvement in commodity prices globally. (Update 1 includes full Fonterra statement, Update 2 includes comment from Fonterra’s Shareholders Council and What I Think it Means)
Fonterra raised the milk price component of the payout from NZ$4.60/kg to NZ$5.70/kg, but has cut the value add return (distributable profit) to 35 cents/kg from 50 cents/kg. It increased the advance payout rate for the season by 75 cents to $4.00 kgMS.
Fonterra Shareholders Council Chairman Blue Read said farmers would be surprised by the size of the increase.
“We look forward to the increase flowing through to farmers’ cash flow. Receiving this news should help restore farmers’ confidence that the food industry is one of the best to be in especially during depressed global economic times,” Read said.
Fonterra also said it would declare its profit retention policy and its fair value share valuation in December if farmers voted for Steps 1 and 2 of its capital reforms at its annual meeting on November 18.
What I think it means
This will be a major boost for the regional economies that are driven by the Fonterra payout, in particular Northland, the Waikato, Taranaki, the Bay of Plenty, Manawatu, South Canterbury and Southland. It may help save some very indebted dairy farmers and their financiers.
This is particularly good news for South Canterbury Finance, which is trying to sell as much as NZ$500 million worth of dairy farms over the next year or so.
It will also help bolster farm values and, more importantly from a bank point of view, the value of the loans underneath those farms.
A key question though for any farmer or banker looking to rely on this forecast is how sustainable it might be. It is dependent on the currency staying off its highs and the global economy continuing to recover.
Here is the full statement below from Fonterra.
Fonterra announced today a further increase in the forecast payout to its farmer-shareholders for the current 2009/10 season. The Milk Price increases $1.10 to $5.70 per kilogram of milksolids (kgMS), while the Distributable Profit (Value Return) is 15 cents lower at 35 cents per kgMS.
This means the Co-operative’s forecast of the total amount Available For Payout increases 95 cents to $6.05 per kgMS.
The new forecast compares with an opening forecast for 2009/10 of $4.55 per kgMS and a revised forecast of $5.10 per kgMS announced on 22 September 2009.
Fonterra Chairman, Sir Henry van der Heyden, says although the recovery in consumer demand and the global economic situation remain relatively fragile, the higher forecast reflects the Co-operative’s increasing confidence around the recent gains in international dairy prices.
“The improvement in global dairy markets reinforces that dairying is a business that’s in good heart with sound long-term prospects, both for Fonterra shareholders and the broader New Zealand economy.
However, Sir Henry cautioned: “A big gain like this in the payout forecast, just shows how much volatility there is in the market.
“It’s heading in the right direction and we’re making the most of the opportunities for our farmers. But, we also know there’s a risk of rapidly rising prices potentially bringing on more milk from other countries. We saw this happen in 2007 and we saw how quickly the market can fall as a result.”
At its meeting to review the payout forecast, the Board also agreed that if farmer shareholders vote in favour of Capital Structure Steps One and Two at the Annual Meeting on November 18, the Board would ensure farmers had all the information they needed to make decisions around the purchase of additional shares. This would include advising farmers of the interim Fair Value Share valuation and any dividend retention policy early in December.
Fonterra CEO, Andrew Ferrier, says improving market conditions for dairy commodities have been reflected in recent trading events on Fonterra’s globalDairyTrade (gDT) online platform, which in the last financial year accounted for about 10% of Fonterra’s sales.
Since the September forecast revision, there have been two monthly trading events, the most recent when whole milk powder (WMP) prices rose by an average 13.7 per cent. Over the past four months, average WMP prices on gDT have risen by a total of 88 per cent.
Mr Ferrier says there is a tight supply situation globally for many dairy commodities and this is reflected in current pricing. Fonterra has also recently confirmed some key contracts with major customers, further improving confidence about the season’s outlook.
“Although prices for all dairy products are now increasing, the recovery has been strongest across the range of commodity milk powder streams that are used as the basis for the Milk Price component of payout to Fonterra farmers. This is good for our farmers, as it drives a higher milk price, but it is putting profits under pressure”.
“Prices for non-powder products such as cheese and casein have not risen at the same rate as powder prices. Under Fonterra’s new Milk Price, if Fonterra cannot achieve an equivalent return for these products compared to milk powders, the difference comes off profit. This is the primary reason for our forecast reduction in profit,” Mr Ferrier says.
Although Fonterra expects the differential in returns to recover over the medium term, returns for non-Milk Price products are forecast to be lower, relative to powders, for the remainder of the current financial year. As a consequence, the Distributable Profit (Value Return) forecast has been reduced by 15 cents to 35 cents.
“The other business units that contribute to profit (principally the consumer Brands businesses and global dairy ingredients and foodservices) continue to perform well and their expected earnings for 2009/10 remain unchanged from previous forecasts.
“However the high NZ$/US$ exchange rate would impact negatively when the profits were converted back into New Zealand dollars.
“The high dollar is certainly hurting earnings, and the level of volatility is making forecasting a challenge. The opening forecast for 2009/10 was based on an exchange rate of US59 cents, and the New Zealand dollar has recently been trading as high as US76 cents.
“Although recent exchange rates have been fully factored into the revised forecast, and we have a portion of hedging in place at this stage of the season, there remains significant uncertainty about the medium to longer term exchange rate outlook,” Mr Ferrier says.
Tags: Andrew Ferrier, Fonterra, Fonterra payout, Henry van der Heyden
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November 9th, 2009 at 8:26 am
Wow, maybe there’s some respite for over-indebted dairy farmers after all. A good chance for South Canterbury Finance to ditch its dairy farms while conditions aren’t too bad.
November 9th, 2009 at 9:27 am
This suggests that dairy industries and Fonterra haven’t learnt a great deal from the 2007-2008 boom-bust price cycle. Spot prices are rising even faster than in 2007, and Fonterra’s projections appear to be based on that pattern continuing through the full season.
Somewhere the bust part of the cycle will kick in. I think that could be a really ugly time.
November 9th, 2009 at 9:28 am
Cannot help but think that the Banks will reinstate Alan Crafar in charge of Crafar farms.
Good news for the industry – my guess is that there will be a lot of debt paid down this year.
November 9th, 2009 at 9:38 am
Massive increase. Fantastic news for the regions.
November 9th, 2009 at 9:45 am
Yes this is great news. And yes, Don, I suspect this will correlate into principle repayments: lessons must have been learned over the last two seasons.
November 9th, 2009 at 9:57 am
NZ$ already up to 0.7340 on back of this news………The Lord giveth with one hand and taketh with the other
November 9th, 2009 at 10:10 am
Check your facts raf. My exchange rate watch says .7242. (Briefly hit .73 2 days ago.)
November 9th, 2009 at 10:13 am
I’m watching this. We’re at 0.7342 as I write.
http://www.forexrate.co.uk/charts/nzdusd.php
November 9th, 2009 at 10:16 am
tumtetum
i actually trade from live prices not charts
Often the early Monday morning moves are not picked up on web based price services.
November 9th, 2009 at 10:22 am
Perhaps it will be repayments of principal
November 9th, 2009 at 11:34 am
Anyone want to put money on NZ’s agricultural debt coming down? Even once month on month? It has happened before but the last time was in February 2001.
November 9th, 2009 at 12:20 pm
PeterR
You are right about debt repayment. The history is not good. Farmers have tended to assume the higher price will stay and simply double down on debt
cheers
Bernard
November 9th, 2009 at 1:47 pm
The way I see it was either raise the payout or face major problems for the industry. Some farmers have had to leave already and a lot more were about to leave.There are lots of unpaid debts owing to suppliers of the dairy industry.Also the banks were getting very anxious with the debt to equity ratio on some farms. I guess the banks will get some of their money back and the suppliers will not get a fair suck of the sav as per usual!
November 9th, 2009 at 2:20 pm
um …
yes, principal.
November 9th, 2009 at 2:24 pm
Bernard Hickey, you’re right on the money about what this means for South Canterbury Finance and other dairy financiers and farmers.
I’ve posted a new blog post:
Fonterra Payout Increase Buys Time for South Canterbury Finance
With the news today that the Fonterra milk payout has been increased from $5.10 to $6.05 will my prediction of doom and gloom for dairy farm prices and dairy farm owners and financiers be proved wrong?
For the rest of it go here:
http://davidhillary.blogspot.com/2009/11/fonterra-payout-increase-buys-time-for.html
November 9th, 2009 at 3:23 pm
People are such sheep – I guess if you have the wherewithal then it would be a great time to invest in a dairy farm. Difference between a rich farmer and a poor farmer – the rich farmer buys a tractor/farm etc when everyone else can’t afford to and can therefore negotiate better price/terms. If we’ve learnt one thing from the last couple of years it’s to follow our own intuition and have the strength of mind to go against the ‘popular view’ held by our so called rural professionals who don’t really know any more than we do (unless they have crystal ball!).
November 9th, 2009 at 3:35 pm
This is exactly what Cornell University predicted.
they are predicting a lift in prices followed by a complete collapse due to oversupply and falling demand that could take years to resolve.
Von Mises
November 9th, 2009 at 5:23 pm
Does anyone remember a certain Fonterra Bond issue a while back?. Or am I mistaken?
Wonder where the money went?.
And is an average of 20K enough to stave off the creditors for sum, if not others?.
At least they will not be paying TAXES on the windfall….eh….not the KIWI way.
Keep them ducks legs a paddling.
Living on borrowed time…as well as money, is the KIWI wa…hey..
You can Bank on it.
November 9th, 2009 at 9:35 pm
Fonterra has more control over exchange rate than Bollard
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10608259
November 9th, 2009 at 10:44 pm
TV news tonight said an average of $100k – showed famers eyeing up tractors and planning overseas holidays. So looks like a spend up is on the cards rather than debt reduction.
November 11th, 2009 at 9:42 pm
Absolute tosh! We don’t know anyone planning either a tractor purchase or an overseas holiday in the near future. Once again the media mislead the public…they always quote the gross figure without deducting costs (approx. 60%), tax… If it isn’t bad enough that we always get our income details splashed all over the headlines the least they could do is get it right!!
November 11th, 2009 at 11:17 pm
TV1 & 3 don’t just report the news , they ” create ” it too . A little embellishment here or there , call it editorial licence , to put the right amount of showbiz into a piece . ( On this thread , city folk are gonna be green that farmers are living it up . Create a little envy & dismay at the cockies’ perceived windfall , and largesse )
November 12th, 2009 at 1:57 pm
Absolutely right Roger Thompson – the media in this country have become very good at perpetuating the perception that farmers are all a bunch of brainless hicks doing a brainless job thus making it seem like any ‘windfall’ they get is like they’ve got lucky and won the Lotto!! People overseas have commented on the fact that farmers here not only work the farm but also run the business side of things as well which is not often seen in other countries. This is where New Zealand’s future lies – not in producing more and more milk – but adding value to it – producing sophisticated products for an increasingly demanding marketplace. It’s time for the media to raise the bar and I challenge them to remove their narrow minded farming stereotypes.