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Fonterra raises 2012 payout forecast range by 20 cents; Holds estimated fair value share price for 2013 season at NZ$4.52

Fonterra raises 2012 payout forecast range by 20 cents; Holds estimated fair value share price for 2013 season at NZ$4.52

Fonterra has increased its forecast payout to its dairy farmer owners by 20 cents per kilogram of milk solids for the 2012 season citing a "modest recovery" in global dairy commodity prices over the last couple of months.

The co-operative says the increase takes the 2012 season forecast to NZ$6.90-NZ$7.00 for a fully shared up farmer, 20 cents higher than the previous forecast. This comprises a Fonterra farmgate milk price of NZ$6.50 per kilogram of milksolids, up from NZ$6.30, and an unchanged distributable profit forecast range of 40-50 cents per share.

Meanwhile, Fonterra also said its estimated fair value share price for the 2012/13 is NZ$4.52 per share, the same as the current season’s price.

See Fonterra's statement below:

Fonterra raises 2012 payout forecast range by 20 cents

Estimated Fair Value Share price for 2013 Season remains at $4.52

Fonterra announced today an increased payout forecast range for the 2012 Season of $6.90-$7.00 for a fully shared up farmer, up 20 cents on the previous forecast. The revised forecast comprises a Fonterra Farmgate Milk Price of $6.50 per kilogram of milksolids (kgMS), up from $6.30 kgMS, and an unchanged Distributable Profit forecast range of 40-50 cents per share.

Fonterra is required to consider its Farmgate Milk Price every quarter as a condition of the Dairy Industry Restructuring Act (DIRA).


Fonterra Chairman Sir Henry van der Heyden said the new forecast reflected a modest recovery in global dairy commodity prices over the past two months.

Fonterra CEO Theo Spierings said prices had edged up in three of the last four fortnightly auctions on the online trading platform GlobalDairyTrade (GDT). The GDT-Trade Weighted Index was now 5.8 per cent above its recent low in early October. Mr Spierings said world dairy trade growth was being led by powders (combined whole milk and skim). This reflects strong demand especially in emerging markets, including a number of ASEAN economies, as well as Brazil, Mexico and China.

While foreign exchange volatility remains, the impact on the Fonterra Farmgate Milk Price becomes less further into the season as the proportion of foreign exchange hedging increases.


Fonterra also announced the Estimated Fair Value Share Price for the next season in 2012/13 is $4.52 per share, which is the same as the current season’s price. The Independent Valuer, Grant Samuel, has estimated a Restricted Market Value range for Fonterra shares with a mid-point of $4.26 per share as at 1 June 2012, the start date of the 2013 Season.

The estimate is 2 per cent, or 8 cents per share, higher than the valuation for the current 2012 Season. As the mid-point of the Valuer’s estimated range remains below the current Base Price of $4.52 that applies during the transition to a Restricted Market Value, the Fonterra Board has determined that the estimate for the Co-operative share price for the 2013 Season will remain at $4.52 per share.

The final share price for the 2013 Season will be determined in late May 2012 after the Board receives a final valuation from the Valuer. Sir Henry said the valuation increase per share primarily reflected the impact of retentions in further reducing Fonterra’s overall debt levels:

“This is in line with the Board’s strategy to maintain a strong balance sheet during these volatile and uncertain times. It also positions the Co-op well going forward, as we invest to grow future farmer returns.”

Sir Henry noted the valuation had been adversely affected by exchange rate movements since the previous valuation in May 2011. In particular, a higher New Zealand dollar against many overseas currencies was eroding expected valuation gains for Fonterra’s businesses and investments in Asia and South America.

“If exchange rates had stayed around May 2011 levels, the Restricted Market Value could well have been close to the $4.52 Base Price. Even after this exchange rate impact, we have recorded a modest increase in share valuation. This compares favourably with share price declines averaging up to 10 per cent or more since May on NZX and world equity markets.”

Sir Henry said the Valuer stressed that the Restricted Market Value was not an estimate of where Fonterra shares will trade immediately after Trading Among Farmers commences. Rather, it reflected the Valuer’s view on the likely long-run average discount to Fair Value. The Valuer also noted that in practice the discount would swing depending on dairy industry and equity market conditions.

“As well as taking into account the views of the Valuer, the Board will seek expert advice on the price that shares are likely to trade at before making a decision on TAF implementation,” Sir Henry added.

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Not too surprising with seven billion mouths to feed. Fonterra and NZ Dairy interests in general have a solid future ahead of them.

However, the pricing variations seem to have as muhc to do with the wandering exhange rate between the NZD and USD as they do with actual action prices and contract.

I do wonder whether auctions and prices will need to start being denominated in the Chinese RMBI rather than the irrelevant USD.  

LOL.....RMBI..........the USA would cut our nuts off........they would turn us into the Cuba of the south pacific....

But I think it will come........the US will become less and less relevent to us...China more and more....


.the US will become less and less relevent to us

Mmm... the Fonterra GDt is becoming more relevant to the US as an export platform so I don't think the RMB will be currency of choice for a while yet. Murray Goulburn (Aus) is also using the platform to sell some product.

Yet, by all means Im not talking inside 5 years say.  I mean i really dont know how the next year will go....lets say the EU holds it together, the USA is in a very bad way.....and asia as a market thats growing......I think given the costs of transport,  the fiscal position of the US and how restrictive they will become that our market in the US will decline and Asia will out past 5 years...

Now I think the EU bubble will "pop" and that will throw the US into a depression as well...China wont be selling so wont be buying and that could get ugly for them....who knows in that situation which countries we will be able to trade with....

So many possibilities..........most of them ranging from not good to bloody awful.


Think that though there PJK I don't think Fonterra want to quit their hedge position just yet ....being responsible for 18% of the bottom line.

It'll be a grand xmas feast at Casual observers place this year!

I look forward to Colin Riden trying to put his doomsday spin on it.

Aye, SS.  And it will be a Southland Christmas for us this year. :-)

You won't have done too shabby this year either I suspect. ;-)

Season's greetings to you and yours.

Sheep Shagger, it is good to see my cautious approach comes front of mind as soon as Fonterra starts rolling out the good news. Qute how you accurately forecast a share price for the 2012-213 year late in 2011 I don't know, but maybe that is the point.

And yes, I would be a little concerned as despite announcements of significant increases in NZ milk production this season, our export stats don't show volume increases in dairy products being shipped - in fact for the start of this season there appear to be reductions YoY. 

In terms of doomsday spin, I will simply quote in full Fonterra and Sir Henry with their October press release announcing reduced payout:

Fonterra has announced a revised payout forecast for the 2011/12 season of $6.70-$6.80 for a fully shared up farmer, 45 cents lower than the opening payout forecast announced in May.

The revised forecast comprises a lower Fonterra Farmgate Milk Price of $6.30 per kg milksolids, down from $6.75. The season's Distributable Profit range forecast of 40-50 cents per share remains unchanged.

Fonterra Chairman Sir Henry van der Heyden said the lower Farmgate Milk Price forecast 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", said Sir Henry.

Overall, the GDT-Trade Weighted Index is down 15.7% since May 3 when the opening forecast of $6.75 per kgMS was announced.

Coupled with ongoing foreign exchange volatility and overall global economic uncertainty, the Board had revised down the Fonterra Farmgate Milk Price forecast.

Sir Henry said the opening forecast had anticipated an initial softening of international dairy prices, followed by a recovery.

"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.

"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."

Sir Henry said the Board was committed to providing the best available information to farmer shareholders on a timely basis so they can plan accordingly. The forecast revision acted as a reminder to farmers to take a conservative approach with their farm budgets.

On the positive side, Sir Henry said there had been a strong start to the season. A long stretch of favourable weather in New Zealand had boosted pasture growth and contributed to record milk flows across the main dairying regions.

SS, i just had my second draft, ;-).

However I think the world is going to over produce, competition is coming. THis from Peter Brandt

The Corn market is poised for a 35% price decline. Being short Corn futures is one way to play this decline. Another way is to be long certain stocks.

The profit margins of chicken producers is directly affected by Corn prices. The average live weight of chickens slaughtered in the U.S. is just north of five pounds. Chickens eat about 2.1 pound of feed to gain one pound. Thus, a typical chicken eats about 11 pounds of feed in its short life.

In 2010, U.S. poultry production equalled about 37 billion pounds. This equates to 77.7 billion pounds of chicken feed. Corn is a key ingredient in poultry feed (running as high as 50% in some feed mixes, depending upon many factors). Conservatively, chickens in the U.S. consume about 25 billion pounds of Corn and corn by products.

A bushel of Corn weighs 56 lbs. At $6 per bushel, Corn is worth something south of 11 cents per pound. Thus, Corn consumption in the poultry grow-out process could run as high $2.3 billion per year (using the assumptions provided). Thus, a 35% drop in Corn prices represents an $800 million savings to poultry producers.


The Aussies have goit a bit carried away with the wheat.

Huge crop

And there were some negative fundamental events to factor in too. Notably a huge upgrade, to 28.3m tonnes, in Australia's forecast for its ongoing wheat harvest.


There is a lot of wheat, a lot of it is feed quality.  I dont know where the next crack is going to appear but I think over production of Agriculture is worth keeping an eye on. If the prices keep this high then next years planting is going to be momentous.

 As for me I just got a massive tax bill so I must be doing OK, Im paying the PM's salary.

But Aj, farmers don't pay more than $1500 tax a year! ;-)

CO, Id be happy to be only paying  100x that, may have to revist the farmers pay no tax thing. Instead Im helping out fellow NZers who were not born with the same work ethic I was, poor things.

Colin, I think that this is a very good sign. Fonterra being confident enough to lift forecast when there has been a global supply response to the recent higher priceing suggests demand has held up well. This coupled with the bumper volume flows through the first part of the season suggests to me the average dairy cocky will be doing just fine.

Aj, Hopefully those two drafts cover your globe trotting expenses:) Im expecting to read that your've purchased a ranch in Brazil or the Pampas anytime soon. My first draft isnt until next week  so its still eager anticipation for me.

As for the production threats from competing meats, USDA  forecasts are reasonably supportive of good priceing for 2012. Chicken down 2% Pork up 1.7% and Beef down 4%. I agree corn is the one one to watch when the dec 23 update comes through. However I suspect that the oil price holding up should help biofuels soak up any extra.

From MAF today:

MAF has released a half-year update to the annual /Situation and Outlook for New Zealand Agriculture and Forestry/ (SONZAF) report, which was published in June.

The update shows the 2011/12 pastoral production season started with generally favourable spring weather which has meant plenty of feed for milking cows, ewes with new lambs and growing beef animals.

MAF expects overall pastoral production for the 2011/12 season to be above average.

Prices for pastoral agriculture have generally remained at historically high levels during the past half-year, despite the deteriorating global economy and high exchange rates.

Emerging markets for food and other primary products continue to grow, but the outlook is for weaker growth in many advanced economies such as the European Union.

This will take some of the shine off, says Alan Hook, MAF Manager of Sector Innovation, but prices are still generally well above average.

The dairy sector faces a squeeze between increased supply from other major exporting countries and slowing demand from major importers such as China. This saw the milk price for the current season revised to $6.40 per kg milksolids, down $1.20 on the previous season.

However, the sector’s expected total earnings, at $13.6 billion for the year to end of June 2012, will still be the highest to date.

The lamb schedule price for the year to September 2011 was the
highest in inflation-adjusted terms since 1977, due to reduced supply on global markets.

New Zealand’s spring 2011 lamb crop is estimated to be 7 percent up on last year.

MAF is forecasting weakening export lamb prices as global supply increases over the next two years.

Wool export prices continue to rise, underpinned by strong Chinese demand for raw product and demand for finished wool products in the European Union and the United States.

However, MAF is forecasting that a weaker global economy will slow wool demand and moderate pricing in the next two years.

In-market pricing for export beef has reduced from the record peak of April 2011 but still remains relatively high.

This is fuelled by robust demand from Asian markets.

Over the next two years, a weakening global economy and slight increases in exports from competing countries are expected to drive New Zealand beef schedule prices downward.

Biofuels influence on grain, not so good if you need to put bread on the table to live (parts of Latin America) or are starving (Africa).