Fonterra hikes 2010/11 payout forecast by 60 cents to NZ$7.90-NZ$8.00

Fonterra hikes 2010/11 payout forecast by 60 cents to NZ$7.90-NZ$8.00

Fonterra has hiked its forecast payout today by NZ$0.60/kgMS

Each NZ$0.10 is worth about NZ$125 million of revenue to Fonterra suppliers, so this increase should add approximately NZ$750 million to the domestic economy.

See the release from Fonterra below:

Fonterra announced today an increase in its forecast Payout range (before retentions) for the 2010/11 season from $7.30-$7.40 to $7.90-$8.00.

The forecast Payout incorporates a forecast Milk Price of $7.50 per kilogram of milksolids (kgMS), 60 cents higher than the previous forecast; and a Distributable Profit range for the 2011 financial year of 40-50 cents per share (unchanged from previous forecast).

Fonterra has reduced the target dividend range to 25-30 cents per share (previously 25-35 cents per share). The dividend would be paid out of Distributable Profit.

As a consequence, Fonterra now forecasts that a 100 per cent share backed farmer will receive, on a cash basis, a total of $7.75-$7.80, with the balance of Distributable Profit being retained by the Co-operative.

Forecast Milk Price

The latest increase, combined with a 30 cents increase announced last December, means the forecast Milk Price for 2010/11 is now 90 cents higher than the season’s opening forecast of $6.60 per kgMS, and $1.40 ahead of the 2009/10 season’s $6.10 per kgMS.

Fonterra Chairman Sir Henry van der Heyden said the latest increase in the forecast Milk Price reflected further strengthening of international dairy prices over recent months. For example, the average price achieved at the latest trading event on the globalDairyTradeTMplatform held 15 February 2011 was 23.7% higher than the 1 December 2010 trading event which took place a few days before the December re-forecast.

As Fonterra is now entering the latter stages of the season, a good proportion of this season’s production has already been sold. Therefore, current market prices only have a partial influence on the 2010/11 Milk Price, which is calculated as an average across the season.

Sir Henry commented: “This significant Milk Price increase is welcome news indeed for Fonterra farmers, many of whose farm businesses remain under pressure after several challenging years and a current season marked by some difficult weather conditions. It’s also good news for the New Zealand economy and underlines the importance of dairying to New Zealand’s ongoing prosperity.”

Although weather conditions had affected production in many parts of the country, total milk production in 2010/11 by Fonterra’s farmer shareholders was expected to be broadly in line with the previous season, Sir Henry said.

Chief executive Andrew Ferrier said higher dairy market prices appeared to be driven by a combination of strong demand from China and other Asian markets, and tight international supply due to adverse weather conditions in many parts of the world. “These higher prices have more than offset the negative effects of an appreciating Kiwi dollar against the US dollar.”

Mr Ferrier said despite the impact of weather factors, global supply was still growing - although at a slower rate than previously expected. Fonterra now estimates global milk production for the 2010 calendar year grew by 1.8%, down from an earlier estimate of 2.0%.

Forecast Profit and Dividend

Fonterra has held its forecast Distributable Profit range for the 2011 financial year at $550-$690 million, which equates to 40-50 cents per share. This is despite an expected reduction in operating earnings (compared with the December forecast) related to the Milk Price increase. This reduction in operating earnings is forecast to be offset by some one-off profit benefits expected to be confirmed during the second half of the financial year. At the Distributable Profit level, the aggregate value of  these one-off profit benefits is  expected to be broadly in line with the value of one-off items included in Fonterra’s 2009/10 financial result.

Distributable Profit is the amount available for distribution to Fonterra’s farmer shareholders, should all the current year earnings be declared as a dividend. At this stage of the financial year, Fonterra treats Distributable Profit as equating to Net Profit After Tax.

Mr Ferrier said Fonterra’s profits were primarily driven by the ability to make and sell a range of dairy products at a margin above the cost of milk collected from farmers (as reflected in the Milk Price, which is highly influenced by powder products).

In the 2011 financial year, the margin squeeze due to higher milk costs is anticipated to mostly affect earnings within the businesses that made up Fonterra’s Commodities & Ingredients segment. While higher commodity prices were starting to have an impact across the consumer businesses, aggregate earnings from the consumer business segments were expected to be broadly in line with the 2010 financial year, Mr Ferrier commented.

Given the forecast decrease in operating earnings, the Fonterra Board has decided to reduce the target dividend range to 25-30 cents per share, from the previous range of 25-35 cents per share. The actual dividend to be paid for 2011 remained at the discretion of the Board, Sir Henry noted.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Hard to get back to normal, anyway.

And now having built this house of cards I'm going to turn the fan on it. 

If you have followed these blogs over time you will know that I do believe that the US has a significant effect on world dairy prices. Here are just a few reasons why:

  • China's currency is pegged to US dollars. Their capacity to pay on export markets (and in fact their entire economy) is affected by the strength of the US economy and the US dollar.
  • A weaker US dollar and high dairy prices makes export markets attractive to US processors
  • The US has the capacity to turn on additional dairy production very quickly. They can easily add a couple of billion litres to international supply within 12 months.

So on the one hand I don't believe that dairy commodity prices, and the effective value in Oceania, have been adversely affected by the strengthening of AUD and NZ currencies against the US dollar in 2010. Indeed if you read my blog of a few weeks ago I think it is possible that New Zealand dairy farmers at least will enjoy a windfall gain from a rising local currency.

On the other hand a weak US dollar and attractive international prices are a real risk to dairy commodity prices in 2011. As we did in 2007, Europe and Oceania are again inviting the US to the international dairy trade party. It won't be fun, they are very good at low cost large scale production.

I won't argue with what you posted but note this:

"I think it is possible that New Zealand dairy farmers at least will enjoy a windfall gain from a rising local currency."

That is true but then the gain runs out as the currency stabilises for a long period, or turns into a significant loss if the currency declines. There has been much currency gain and few falls since Fonterra was formed - the USD FX rate they achieved for their first year was 0.44. Then 0.48, 0.52, 0.61, 0.66, 0.67, 0.77, 0.665 and 0.667.

I agree that prices are unsustainable, but i dont believe that there will be much of an increase in US output.  Milk price alone  is not what drives production decisions on US dairy farms,  it all about the ratio between feed price and milk price.  At the moment the ratio is not at profit levels.

Also the cost of production in the US is much much higher than in NZ thats why they need subsidies to esist.  Their systems have huge fixed costs, they are very vulnerable when there is an imbalance between feed cost and milk price as we have now.

I think prices will eventually fall because demand will burn off, remember the chinese are new dairy consumers they could stop consuming very easily.