Fonterra cuts payout forecast

Rural News

Fonterra cuts forecast farmgate milk price for 2011/12 by 45c/kg to NZ$6.30/kg and leaves distributable profit forecast at 40-50c/share

25th Oct 11, 5:25pm by Bernard Hickey

<p> Fonterra cut its forecast payout for 2011/12 to around NZ$6.62/kg, down from an initial forecast of around NZ$7.05 and down from 2010/11's cash payout of NZ$7.90/kg.</p>

Fonterra cuts payout forecast 45c/kg due to lower commodity prices and high NZ dollar, but sees record milk production

Fonterra has cut its forecast payout for the current 2011/12 season to a maximum total of NZ$6.70/80 per kg, including a farmgate milk price of NZ$6.30/kg and an unchanged distributable profit of 40-50 cents per share.

Fonterra said the 45 cent cut in the farmgate milk price reflected a continued softness in commodity prices and a stronger New Zealand dollar.

“This softness of commodity prices has been reflected on Fonterra’s online trading platform Global Dairy Trade (GDT), which has experienced eight successive price falls – and one uptick – since May,” van der Heyden said.

Fonterra has a policy of paying out 65-75% of distributable profit, with the rest retained to build up capital. That means the actual cash payout could be around NZ$6.62/kg, including the milk price of NZ$6.30 and a dividend of 31.5 cents per share. The cash payout in the 2010/11 season was NZ$7.90, including a milk price of NZ$7.60 and a dividend of 30 cents per share, which was 69% of the distributable profit.

The GDT-TWI has fallen 15.7% since May 3 when the opening forecast for 2011/12 was announced.

“We aren’t yet seeing the recovery of international dairy prices we initially anticipated and we are also dealing with a much stronger New Zealand dollar," he said.

“Higher prices often lead to increased supply into global markets from our global competitors, as well as reduced demand. We are seeing this and it is impacting prices.”

The lower forecast was a reminder to farmers to take a conservative approach with their farm budgets, van der Heyden said.

He noted, however, there had been a favourable start to production for the season, with good weather boosting pasture growth and contributing to record milk flows across the main dairy regions.

Dairy prices

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Source: GlobalDairyTrade and USDA

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11 Comments

by skudiv | 25th Oct 11, 6:08pm 1319519327

It's only october and they are already cutting the forecast, wait till after christmas, I expect further downside, with little support under prices in a "record production" year, its only spring, hopefully his weather forcast is more accurate then his payout forcast. The long term average is about 5 bucks, so pleanty of room down there. Unbelievable forcasting the payout based on prices increasing, may as well get out my horoscope and trust that. You honestly believe a chinaman making 10 bucks a day can afford to buy milk when its an $8 payout?

by Casual Observer | 26th Oct 11, 8:00am 1319569250

This was totally expected. No surprises there. The forced dumping of milk will be of more concern to suppliers.

by Colin Riden | 30th Oct 11, 2:19pm 1319937558

This was totally expected. No surprises there.

True, but it does confirm that Fonterra is not meeting its statutory obligationas to publish information under DIRA regulations:

New co-op must publish the forecasts specified in subclause (1) and the information specified in subclause (2) as soon as practicable after each of the following dates in each season:

(a) 1 June:

(b) 1 September:

(d) 1 March.

Lets see if they can do better in December.

I wonder what payout figures TSY used in their PREFU forecast? I am picking our next set of forecast current account deficits have just grown by another $600 million.

by Casual Observer | 30th Oct 11, 5:48pm 1319950109

I disagree Colin: Fonterra did meet its statutory obligation on 22nd Sept when it announced its payout forecast.

http://www.interest.co.nz/rural-news/55560/fonterra-cash-payout-201011-…

Every year in Oct or Nov (depending on trading conditions) the Board reviews and makes an announcement (which is additional to that required under DIRA) on its payout forecast.

Perhaps it is time NZ stopped being so reliant on Fonterra. IMO we haven't seen the last of the drops.

With regards treasury forecasts - they are likely to be out regardless of Fonterra payouts. ;-)

I sat in with a young farmer, who is in his first year of self employment, meeting with his bankers. I was shocked to hear the bankers (senior managers) say they were surprised that the payout dropped. Where have these guys being - on Mars?

Volatility is the name of the dairy game for the next five years.

by Colin Riden | 30th Oct 11, 6:43pm 1319953407

Casual Observer, you are absolutely correct. I missed it, but I am surprised that by September Fonterra's payout forecast remained unchanged from June. Like you I expect a further drop in this season's forecast payout but I am more concerned about the payout for the season that follows.

You would think someone in NZ should be providing an independent indication (ballpark range) of likely payout for the season following - from historical milk price cycles, known changes in world dairy herd size, and forecasts for world economic growth - with methodology and assumptions stated. Volatility might be less if milk supply (and bankers) responded to likely future prices rather than past payouts.

by Casual Observer | 30th Oct 11, 7:23pm 1319955837

Absolutely correct mist42nz regards a 30c confirmed change in payout.

by Colin Riden | 30th Oct 11, 8:44pm 1319960682

"In line with our policy of transparency, we will continue to monitor market conditions daily and advise shareholders if this forecast payout rises, or falls, by increments of 10 cents."

Henry van der Heyden, from one of Fonterra's earlier annual reports.

There have been some large, and sometimes unexpected, changes in forecast payouts since then.

by Casual Observer | 30th Oct 11, 7:19pm 1319955580

:-) I was at a meeting when the hard questions were asked - and answered. As a result we were given some of the information you suggest above Colin.

I have always suspected that bankers, govt etc look at the dairy industry with rose coloured glasses - because if they take them off they will have no idea how to cope with the reality they will see.

The volatility will come from the forces outside of our control - offshore buyers buying (or not) depending on the financial situation of their various sovereign states economies.

As one sage at the meeting said 'Make sure you put some $ away in the good years because we could be in for the odd horrid year, even though the overall future looks good'.

Was talking to a stock agent recently - they said yearling dairy heifers for export will be selling for $1700 in January. Given that the price for 2year old heifers was $1900, this is a huge increase. He then said 'so that should mean that yearlings for the domestic market will go up to $1200'. It's great for the seller but catastrophic for young farmers.

by Colin Riden | 30th Oct 11, 9:01pm 1319961701

I have always suspected that bankers, govt etc look at the dairy industry with rose coloured glasses - because if they take them off they will have no idea how to cope with the reality they will see.

Dead right there. In my experience TSY's thinking is the most entrained. I think they still haven't publicly accepted asset bubbles are possible - perfect markets and all that. The problem is though broader than just the dairy industry, or even agriculture.

I was at a meeting when the hard questions were asked - and answered. As a result we were given some of the information you suggest above Colin.

Is this information publicly available? I would be interested in it if it was. Clearly it is not getting through to bankers.

by Casual Observer | 31st Oct 11, 3:01pm 1320026508

Don't know if it's publicly available, Colin. Fonterra meet with banks and other rural professionals on a fairly regular basis. It maybe a case of people choosing to listen and not hear.

by Casual Observer | 30th Oct 11, 7:41am 1319913717

Point of clarification mist42nz : It was Westland not Fonterra that clawed back money from its suppliers. As someone who had to dump milk last year due to snow I have no problem with farmers who are forced to dump being paid - you never know when it will be your turn.

I see the cooperative sharing of pain (dumping) as a positive, not a downside. :-)