Fonterra set to cut payout forecast as drop in milk powder prices extends to 28% since April

Fonterra set to cut payout forecast as drop in milk powder prices extends to 28% since April

Fonterra forecast in late May a payout of around NZ$7/kg for the current 2010/11 season.

Fonterra has announced it will review its payout forecast for the current 2010/11 year after auction results overnight extended a drop in commodity prices to 28% since April.

Fonterra's globalDairyTrade reported its index of milk powder prices fell 8.3% in its July monthly auction overnight, taking the fall from its April peak to 24.3% in US dollar terms and 28% in New Zealand dollar terms.

Fonterra said in a statement later on Wednesday the strong New Zealand dollar and further drop in international dairy prices meant that the Board would be reviewing the current 2010/11 payout forecast 'as soon as possible'. Fonterra's board policy is to announce any forecast change when it is worth more than 30 cents/kg.

Fonterra forecast in late May a payout of around NZ$7/kg for the current 2010/11 season, with the potential to rise to NZ$8/kg if commodity prices stayed high and the currency stayed around 68 USc.

Since then powder prices have fallen 24% and the currency has appreciated 7% to over 73 USc.

Prices fell 13.7% in last month's auction.

Paul Grave, globalDairyTrade Manager, said the market was rebalancing amid increasing supply and an uncertain economic outlook.

Anhydrous Milk Fat powder fell 7.6% to US$4,302/tonne in the overnight auction, while skim milk powder prices fell 8.9% to US$2,770/tonne.

Whole milk powder prices fell 7.7% to US$2.974/tonne.

The New Zealand dollar value of whole milk powder has now fallen 28% to NZ$4,056/tonne from its April peak of NZ$5,619/tonne.

The Reserve Bank of New Zealand commented in its July 29 decision on the Official Cash Rate that commodity prices had moderated, which was one of the reasons it saw the Official Cash Rate rise in coming months being slower and lower than its previous forecasts.

A further weakening of commodity prices and strengthening of the New Zealand dollar would further threaten to undermine economic recovery and a rebalancing away from the domestic sector that appeared to have begun.

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FYI I have updated this article with Fonterra's comment that it will now review the payout forecast for 2010/11.

Given current prices and exchange rates, this could push the payout down to around NZ$5.50 rather than the NZ$8 some were hoping for earlier in the year.

cheers

Bernard