Fonterra holds payout forecast, but warns it may fall marginally if current prices and NZ$ rates continue for rest of season

Fonterra holds payout forecast, but warns it may fall marginally if current prices and NZ$ rates continue for rest of season

Fonterra holds official payout forecast range for 2010/11 at NZ$6.90/NZ$7.10/kg, but warns it may fall marginally

Fonterra has announced it has decided to hold its official forecast range for the milk payout for the current 2010/11 year at NZ$6.90-NZ$7.10/kg despite a fall in commodity prices and a firm New Zealand dollar in recent months.

Fonterra argued it saw the potential for less international supply because of weather disruptions in the northern hemisphere and a rise in wheat prices, which tended to reduce the production growth of grain-fed dairy herds and support prices.

Fonterra was also confident about its profit being at the higher end of forecasts. However, if this expected improvement in the outlook for prices did not occur, Fonterra said the eventual payout could be marginally lower than currently forecast.

This is surprisingly good news for the rural economy and provincial New Zealand, given New Zealand's largest exporter flagged on August 4 a potential payout cut because of a 28% fall in dairy commodity prices in NZ dollar terms since April.

Fonterra said the payout forecast range of NZ$6.90 to NZ$7.10 included an unchanged forecast milk price of NZ$6.60/kg and an unchanged forecast profit of 30-50 cents per share.

Fonterra Chairman Henry van der Heyden said the Board had met and confirmed the forecasts for the 2010/11 season, but he reiterated there was considerable volatility in both international dairy commodity prices and the New Zealand dollar.

Although international prices had declined in recent months, there were a number of factors signalling a potential improvement in prices later in the year, Fonterr said.

“While there is still some uncertainty in global markets, if current commodity pricing and foreign exchange rates were at current levels for the rest of the season, then we estimate the 2010/11 payout would be marginally lower than our current forecast," van der Heyden said in a statement.

"However, we are holding the forecast payout of $6.90-7.10 as we are seeing signs of potential strengthening of international prices further into the season,” he said.

'Profit at higher end'

Chief Executive Andrew Ferrier said Fonterra had completed its budget process in late July and expected its profit after tax to be at the higher end of the 30-50 cent range.

Ferrier said the current season was still at an early stage and the outlook was finely balanced.

“On the one hand, the New Zealand dollar remained relatively strong, prices for dairy ingredients had fallen from their April peak and there is some evidence global economic growth is slowing," Ferrier said.

“On the other hand, weather in Europe, Russia, Pakistan and parts of China has affected agricultural production, although the extent of the impact on dairy is unknown. The Russian wheat export ban has contributed to a lift in prices for grain feed, which could lend support to dairy prices," he said.

“The fundamentals for global markets continue to point to balanced supply and demand.”

Fonterra said there was no change to the 2010/11 advance rate schedule, and the opening advance would stay at NZ$4.30/kg.

Fonterra’s annual results and final payout for the 2009/10 season would be released on September 23.

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“While there is still some uncertainty in global markets, if current commodity pricing and foreign exchange rates were at current levels for the rest of the season, then we estimate the 2010/11 payout would be marginally lower than our current forecast," van der Heyden said in a statement. However, we are holding the forecast payout of $6.90-7.10 as we are seeing signs of potential strengthening of international prices further into the season,” he said.R

 

Reading between the lines, are they saying, at current prices we should lower the projected payout but were are hoping things comes right later in the season so we will keep with the higher figure for the time being.

The problem with Fonterra is that the Directors are generally all large dairy farmers and are conflicted when setting the milk price. They want to keep it up and it makes their budgets look good for the Banks. I wonder if any of the directors are renegotiating their banking facilities at the moment. Fonterra need to establish an independent committee (with no diary farmers on it) which provides a monthly estimate of the milk price to improve transparency for the supplier of Fonterra and allow them to respond to the market conditions.

Sam dont you realise that this blog is primarily for doomsday merchants. Fonterra holding payout forecast at $7 is bloody good news for NZ inc. Commentary on this blog was predicting a 28% drop a couple of weeks back.....Bugger!

I agree with the comments above re most farmers not making decisions based on a $8 payout.  All the farmers I speak to are working their budgets on a $5.50 payout and are considering anything above that as an extra.  The penny has dropped for most that you need to look for a sustainable budget, and not make long term decisions on 'flash in the pan' payouts.

There has always been the suspicion that Fonterra directors have a conflict of interest in relation to setting payout. IMHO I wouldn't be surprised if there was some political pressure in keeping the payout announcements up to this level. 

Sheep shagger: Yep it is good for NZ Inc, however it is also likely to be a hollow 'good news' story - "if current commodity pricing and foreign exchange rates were at current levels for the rest of the season, then we estimate the 2010/11 payout would be marginally lower than our current forecast,".  If all things remain equal this payout prediction will not be met, and if prices decline it will mean a more than 'marginal' drop.  Personally I prefer Westlands conservative approach to payout predictions, however Fonterra doesn't have the luxury of being a small player and I believe is under political pressure to 'keep the good news coming'.  A $1/kg/ms drop in payout would not be all bad news either - vast majority of farmers would still be ok.

Twice monthly GlobalDairyTrade auctions will make interesting watching.

As you say, they are the minority, and made their choices relating to debt levels. 

Was talking recently to a number cruncher with clients who converted a totally unsuitable farm and are now their bank is wanting them to make some specific changes to the way they do things to get their costs down/income up.  They are fighting the bank all the way and the number cruncher told them straight up they have no options but to work with the bank or lose everything. They are still in denial. If they can't make it work at $6.10 there's no sympathy from me.