Fonterra cuts payout forecast

Rural News

Fonterra cuts 2011/12 payout forecast 15c to NZ$6.75-NZ$6.85/kg milksolids due to high NZ$ and global production, economic uncertainty

12th Mar 12, 9:31am by Alex Tarrant

Fonterra has cut its payout forecast for the current 2011/12 season by 15 cents to NZ$6.75 - NZ$6.85 per kilogram of milksolids due to the high New Zealand dollar, strong global milk production, and global economic uncertainty.

It says dairy commodity prices are likely to remain under pressure through to mid-2012.

The revised forecast comprises a lower Fonterra Farmgate Milk Price of NZ$6.35 per kg milksolids, down from NZ$6.50. The season’s Distributable Profit range forecast of NZ$570–720 million, equating to 40-50 cents per share, remains unchanged, the co-operative dairy group said in a media release.

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

Fonterra Chairman Henry van der Heyden said the lower Farmgate Milk Price forecast reflected declining commodity prices and a stronger New Zealand dollar.

“We’ve had price declines in the five out of the last six Global Dairy Trade (GDT) trading events,” van der Heyden said.

Overall, the GDT-Trade Weighted Index was down 5.7 per cent since December 13, 2011, when the forecast of NZ$6.50 per kgMS was announced.

Van der Heyden said the New Zealand dollar’s continuing strength, higher levels of global milk production, and uncertainties in international markets led to the Board's decision to lower the Fonterra Farmgate Milk Price forecast.

Fonterra Chief Executive Theo Spierings said the trends were indicating for stronger global production continuing into 2012.

“While we have had a strong start to the season in New Zealand, with record milk flows, we are also seeing higher milk production levels in the US and Europe. International milk powder demand, however, currently appears robust which should help offset the impact of the stronger milk supply growth," Spierings said.

“In the past few weeks, global markets seem to be reacting to the ongoing economic difficulties in Greece, the potential for conflict in the Middle East and China’s reduced growth forecast. These events appear to be having a negative influence on most commodity prices," he said.

“We think dairy commodity prices are likely to remain under some pressure through to mid-2012."

Fonterra said it would announce its interim results and dividend on March 29 2012.

...after being raised in December

The cut today comes after Fonterra raised its forecast in December by 20 cents to NZ$6.90 - NZ$7.00 per kgMs for a 'fully shared up farmer'.

At the time, CEO Spierings said while exchange rate volatility remained, "the impact on the Fonterra Farmgate Milk Price becomes less further into the season as the proportion of foreign exchange hedging increases".

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.

19 Comments

by Wolly | 12th Mar 12, 9:34am 1331498073

This is not happening...it's not in the script....get me those dam spin doctors....nothing to see here...move along you lot....

by Stephen Hulme | 12th Mar 12, 9:56am 1331499371

Bet they got the currency hedging wrong - tripped up by the falsehood spread by incompetent economists that the Kiwi had to fall.

Never underestimate the need for the USD to undergo an orderly decline to be able to liquidate it's obligations back home. And they are huge.

The only alternative is a disorderly one and that is disastrous.

by Alex Tarrant | 12th Mar 12, 9:57am 1331499470

Hi Stephen,

Check out the CEO's comment made in December which I included at the bottom in an update.....

Alex

by Stephen Hulme | 12th Mar 12, 10:15am 1331500504

Hi Alex

Doesn't stop Fonterra's accrued losses, that is marked to market provisions against mistakenly implemented short kiwi sales, if my assumption is right..

I guess they can change their minds as to who wears the cost. Farmer or Fonterra mangement.

Just as the ECB did with it's share of Greek debt - we live in a no shame society

by Kunst | 12th Mar 12, 10:16am 1331500608

"Dairy Milk should be used to make something".

by Colin Riden | 12th Mar 12, 10:25am 1331501157

It says dairy commodity prices are likely to remain under pressure through to mid-2012.

And then what changes, and why?

by Henry_Tull | 12th Mar 12, 10:53am 1331502798

Bingo,

ex the herald Feb 29. 2012

" Rabobank had a trading range of US$3300-3800 a tonne for whole milk powder and prices would generally stay within that during the next five years, he [Rabobank's senior global dairy analyst Kevin Bellamy] said " .

And the banks say lending -wise milk price is $6.

by Henry_Tull | 12th Mar 12, 11:11am 1331503882

and its not like these guys will suddenly drive the price up

ex Paul MC 5 2012:

The offer [ $40.3 million in a rights issue aimed to cut the dairy processor’s debt as a loan repayment looms at the end of the month ] comes after Open Country more-than-tripled its loss to $29.5 million in the 12 months ended July 31 last year as surging milk prices and a strong kiwi dollar sapped earnings. The dairy processor was forced to seek a waiver from lender Bank of New Zealand after it missed banking covenants relating to stock, debt cover and minimum equity.

by Christov | 12th Mar 12, 12:10pm 1331507406

That's when the hedged funds mature Colin.....don't forget it was, I think 12% of the bottom line 2011...so were not talking chicen feed here...

But right now it hurts...maybe..? or just doing a Bolly bleeting about a high dollar that has been working for them.

by Casual Observer | 12th Mar 12, 12:52pm 1331509979

Approx 70c of last years payout was from hedging, so as Christov says, it wasn't chicken feed.

So why should anyone be surprised at this drop? I was more surprised at the rise in payout last year - political interference then and a reality check now??

by Casual Observer | 12th Mar 12, 1:21pm 1331511682

The Chinese buyers usually come back in to the market around August/September, that's what changes. Though I understand it was a bit later last year.

by Andrewj | 12th Mar 12, 11:44am 1331505871

The 80 + conversions in Canterbury must be feeling like they just got shafted, not even in production yet. The banks have been chasing the conversions and after this mornings head office meeting in Wellington its from friend to shit head in one weekend. Farm debt is going up again? Milk could stay at alower level for the foreseeable future. Hell, the average price over the last few years if you remove the last 4 to 5 is $4.40 a kg. When you cock up you blame the frigging $, Im sick of the dollar covering a whole lot of poor management decisions.

Meanwhile its wet and cold and the grape industry is screwed. How would you like to own 100 acres of grapes 200k in running costs, 300 tonnes @ $1200 a tonne, suddenly no income and back to the bank to borrow another 180k for pruning, but for some reason the bank manager won't return your call...

by Casual Observer | 12th Mar 12, 1:01pm 1331510479

As to the conversions Aj, any fool that budgets on more than $5.50kg/ms deserves what they get. Time has proven that payout goes down as well as up and the average isn't what we got last year.

I hear the banks had increased their budgets recently to considerably more than $6/kgms for new lending. Stupid, stupid, stupid. I apply that last sentence to anyone who borrows and budgets at more than $5.50kg/ms also. Hedging plays a not insignificant part in payout makeup - which is why I understand some of the Corporate companies struggle to match Fonterra and be profitable.

by hugeorgan | 12th Mar 12, 12:59pm 1331510363

Are you guys reading the same article. It's only a predictation and it's only dropped 2% vs 14% rise in currency. I think they are doing fine.

by Casual Observer | 12th Mar 12, 1:16pm 1331511411

The drop is a reality - that is the Advance Rate paid to farmers has already being revised downwards. You are correct though - final payouts are always only a prediction so only a fool takes 'predictions' as factual. Farmers who know their stuff will have been expecting this and won't be surprised.

by Realtor in France | 12th Mar 12, 1:09pm 1331510958

Farming like any other business has to be financially geared so as to be sustainable, I do not have any sympathy for those who stick there neck out too far. I am sick of bleeting hand ringing rural and urban folk that blame others for there financial demise. Quite simply we all should employ prudent practice when it comes to borrowing money.

by redcows1 | 12th Mar 12, 5:11pm 1331525490

Yes but where your wrong R in F is that once your in the pooh, if you scream loud enough and get the media on your side this govt is likely to bail you out.

Not an unexpected shift, I did wonder about my conservatism with wanting another position but maybe the butterflies were right.

I guess Westland are holding theirs, just come back from a wedding down there, should have looked and shifted there 20 years ago when we first thought of it. Beautiful place.

by Grant A | 12th Mar 12, 7:37pm 1331534244

Also didnt it go up by a "bonus" 20 cents not that long ago, and this is just taking it part of that way back to what was very comfortable levels for most diary farmers anyway?

Lets not get all excitable, if it becomes a far bigger fall, then give the subject some mileage then,

by Henry_Tull | 12th Mar 12, 8:26pm 1331537173

Westland use DIRA. It put 20 c on their last years pay out

http://westland.co.nz/article/westland-milk-products-track-to-deliver-p…

Synlait probably more Open Country than Westland.

As for the Canterbury conversions, It gets back to the dirt, if they have a potato grower beside them, fine. If they are on a strip of riverbed then there isn't the alt use value support and having to water bomb it locks in costs on the up.

Long story short, we are coming back to long run prices, cause after a couple of good years, other countries production gets drawn in and price does what its doing. On the farm all we can do is knock costs out of the system or the capex.