Fonterra cuts payout forecast

Rural News

Fonterra cuts 2011/12 payout forecast 30 cents to NZ$6.45-6.55 per kg milksolids; announces 2012/13 initial forecast of NZ$5.95-6.05

22nd May 12, 11:00am by Alex Tarrant

Fonterra has cut it payout forecast for the current 2011/12 season by 30 cents to NZ$6.45-6.55 per kg of milksolids, before retentions. This follows a 15 cent cut in March.

It also announced an opening forecast for the 2012/13 season of NZ$5.95-6.05 before retentions. The Co-operative also set the Fair Value Share (FVS) price for the 2012/13 season at NZ$4.52 per share, the same level as in the current season.

The co-op said its Farmgate Milk Price for the current season would be down 30 cents to NZ$6.05 per kilogram of milksolids (kgMS) due to to softening global dairy commodity prices. The forecast Net Profit after Tax range was unchanged at NZ$570-720 million, equating to 40-50 cents per share, meaning a forecast Payout range before retentions of NZ$6.45-6.55 for a 100% share-backed farmer.

The lower opening forecast Payout for the coming 2012/13 season commencing 1 June 2012, reflected an outlook for higher dairy production around the world flowing through to lower international dairy prices. The opening forecast Payout range before retentions was NZ$5.95-6.05, comprising an opening forecast Farmgate Milk Price of NZ$5.50 per kgMS and a forecast Net Profit after Tax range of 45-55 cents per share.

Falling prices

CEO Theo Spierings said the lower forecast Farmgate Milk Price this year was due to continued softening of commodity prices.

“The Global Dairy Trade trade weighted index has declined 20.3% since our last Farmgate Milk Price forecast of NZ$6.35 in April,” Spierings said.

“Dairy production levels in the US and Europe are high, while we continue to have higher-than-normal production levels from New Zealand. All this is occurring at a time of heightened uncertainties in global markets," he said.

With the softening of global commodity prices, operating earnings were expected to be marginally ahead of 2011.

2012/13 Opening Forecast Payout

For the new 2012/13 season and financial year, Fonterra was forecasting a Farmgate Milk Price of NZ$5.50 per kgMS plus a forecast Net Profit after Tax range of 45-55 cents per share. This meant Fonterra was forecasting that a 100 per cent share-backed farmer will earn on average in the range of NZ$5.95-$6.05 per kgMS before retentions.

Fonterra Chairman Henry van der Heyden said the opening forecast for 2012/13 reflected a realistic outlook by the Board towards global dairy markets over the coming season.

“There’s a lot of milk out there and prices have softened. We think that supply and demand should move more into balance later in 2012 which may help ease the downward pressure on prices," van der Heyden said.

“However, there is no consensus among outside experts on how soon we can expect to see prices recover so it is important that we give our best possible estimates to farmers so they can plan accordingly," he said.

Spierings said Fonterra was currently preparing its budget for the 2012/13 year but was targeting a Net Profit after Tax in the range of NZ$670 million to NZ$820 million, equating to 45-55 cents per share. The mid point to this forecast was 5 cents per share higher than the current season mid-point.

The Board had yet to forecast a Dividend range for 2013. Fonterra’s dividend policy is to pay out 65-75% of net profit after tax (adjusted for one-off items and other factors).

Fair Value Share Price

Meanwhile, Fonterra set the Fair Value Share price for the 2012/13 season at NZ$4.52 per share, the same as the current season’s price.

The Independent Valuer, Grant Samuel, assessed a Restricted Market Value range with a mid-point of NZ$4.38 per share. As this was below the current Base Price of NZ$4.52 that applied during the transition to Restricted Market Value, the Fair Value Share price had been set at NZ$4.52 per share, Fonterra said in a media release.

"Grant Samuel’s latest valuation is up 12 cents per share or 2.8% on its mid-point restricted market value estimate of December 2011 and up 20 cents per share or 4.8% on last year’s mid-point restricted market value. This compares favourably to an increase in the NZX50 of 2.5%," Fonterra said.

Spierings said the improved valuation was mostly due to a significantly higher value for Fonterra’s Asia-Africa/Middle East consumer business reflecting continued earnings growth. This was partially offset by a lower enterprise value for the Australia-New Zealand consumer business due to a continuation of challenging market conditions.

Under Fonterra’s Constitution, the Valuer is required to assess two valuation ranges: a Fair Value range for the Co-operative, and a discounted Restricted Market Value range reflecting that Fonterra shares can only be held by supplying farmers. As in previous valuations, the Valuer has applied a 25 per cent discount to the Fair Value range to assess the Restricted Market Value range, Fonterra said.

End of Season Share Purchases

Fonterra also announced today that it would not be issuing dry shares during the 2011/12 end of season period prior to the launch of Trading Among Farmers. Shares would still be issued in anticipation of valid increases in farmers’ production for the 2012/13 season.

Van der Heyden said the Board had taken the decision to "minimise the risk of farmers making decisions about purchasing dry shares ahead of receiving the offer documents in support of the launch of Trading Among Farmers."

“Shareholders will be receiving substantial information leading up to the final vote on Trading Among Farmers in June and on the operation of Trading Among Farmers after that," van der Heyden said.

“We want farmer shareholders to have the best available information on which to base their investment decisions so it makes sense to put a hold on issuing dry shares until all the detail is in. No Board would encourage people to invest without access to full information and this is a similar situation,” he said.

“Then everyone is making their individual decisions based on the same information and are given the same opportunity.”

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29 Comments

by Henry_Tull | 22nd May 12, 11:10am 1337641850

Lets see how the Banks react. Will they change their "Milk Price" number in their loan servicing and loan amount calculations. This number being the one they instruct valuers to use in the mortgage valuations of farms.

for the debt stressing, probably not cows on trucks yet...

But certainly you'd better sell some shares TAF-wise...

How would Dairy Holdings be feeling...

by Bernard Hickey | 22nd May 12, 11:13am 1337642002

Good question.

Do we know what 'milk price' the banks have previously been using?

cheers

Bernard

by ITYS | 22nd May 12, 1:57pm 1337651854

Bernard - ANZ National SQ milk price is $5.75 - and has been for quite a long time.

Henry T - If you're expecting armageddon in the dairy sector you certainly haven't worked in the bank recently and seen the hoops credit managers are putting the managers through and also the intensive monitoring and draconian practises the debt managers have had all of the at risk business working towards. The days of equity lending are well and truly over.

by Henry_Tull | 23rd May 12, 8:09am 1337717388

ITYS, thanks & yes you are right bank-wise. What of farm work expenses in calculating servicing, is it the a one general plug number (SI with water we are told $4), but I could understand a lesser or other $ in Southland or Taranaki?

And yes we have seen a change from all the value talk in $/kgMS etc. The last time this was bank spoken to us the number was $30 (land + shares). Is that still so you think?

by ITYS | 23rd May 12, 10:35am 1337726124

I couldn't comment too much about what current practise is regarding expenses - I have been out of it for 3 years now but obviously still have a number of good friends and contacts associated with the lending scene. The practise that we adhered to was essentially looking at previous 3 year historical costs and using those as basis for forecats SQ expenditure. I was north island so using $/kgms for expenses not useful given the effect of the enviorment on grass production and therefore production. I had one god operator that in a good season would produce for $2/kgms then $3/kgms in the drought.

In terms of value talk - last time i was hearing anything in the North Island it was $35 to $40. Most listings at $45 to $50 but huge shroud of secrecy from RE Scum around final deal.

by diesel | 22nd May 12, 11:37am 1337643422

Hi Henry,

In terms of valuations, banks do not instruct valuers what to use. The banks milk price is used for the formation of internal budgeting etc and is generally regarded as risk adjusted. Valuers who utilise productive analysis make thier own decisions based on transactional evidence and budgeted payout levels by market participants. This generally tends to be based around a 3 - 5 year average and the Agrifax data projections.

At this stage, demand remains high, with limited avaliability of quality farms in some regions meaning that properties are still transacting at levels equivelent to lus or minus 5% of the median levels.

In saying that, the absolute peak level transactions or expectations appear to be unachievable and have been since the April 17 global dairy trade auction.

by Henry_Tull | 23rd May 12, 8:22am 1337718172

Morning Diesel, yes thanks, we have seen the syndicaters using agrifax forecast as basis for the revenue line, (but not valuations) of late.

ITYS is interesting in mentioning the equity lend/asset lend is not on at present.

Our thinking re value is more in how people value cyclical companies (as when farms get a bit bigger, its not like one fit & keen individual can make it come right) and so a long term est. $ value is what we use (and this is much lower than the agriax pin on the dart board) as we are daily concentrating on earnings which makes use look at grinding down costs, not a value $/kgMS (when we aren't selling).

by diesel | 24th May 12, 1:00pm 1337821204

Hi Henry,

Transacations occuring / offers as we speak in mid to late $40,000 / hectare level for quality farms, limited supply keeping demand strong even in full view of payout decrease.

Cost control is the keep to value and long term viability. I think the market will only become more descerning in regards to higher cost systems / farms especially where a number of these costs are fixed (barn farms / high cost water).

by Alex Tarrant | 22nd May 12, 11:31am 1337643099

Seeing comments that the market was expecting NZ$5.80 for the 2012/13 season, hence a little surge in the NZ$ as it was not as bad as expected....

Still not good though.

by redcows1 | 22nd May 12, 11:35am 1337643314

Interesting because ones I read we're saying that $5.80 was the milk price.

by redcows1 | 22nd May 12, 11:35am 1337643324

Interesting because ones I read we're saying that $5.80 was the milk price.

by Christov | 22nd May 12, 12:19pm 1337645944

The NZD resurgence Alex will be short lived....June 8 or 9....mmmmmm yes, I think so.

Once again Henry T...on the ball.

by Colin Riden | 22nd May 12, 12:59pm 1337648393

“The Global Dairy Trade trade weighted index has declined 20.3% since our last Farmgate Milk Price forecast of NZ$6.35 in April,” Spierings said.

20.3% off that Farmgate Milk Price forecast ($6.35) would equate to $5.06 for the 2012/13 season. Expect further significant reductions from $5.50 for 2012/13.

And as per Kate:

http://www.interest.co.nz/rural-news/59411/fonterra-cuts-201112-payout-…

by Kate | 22nd May 12, 11:49am 1337644174

This statement;

.. there is no consensus among outside experts on how soon we can expect to see prices recover ...

Implies that there is however consensus that prices will at some stage recover.

This tendency for society-at-large to cling onto the notion of a return to business-as-usual is a concern as I just don't know whether such possibilities are supported even by the flawed model of economic assumptions we presently operate under. It seems to me that there can only be a "recovery" in commodity prices in the event one of two things happens (economically speaking that is):

1. Globally wages lift at a rate greater than or equal to the rate of inflation.

2. Scarcity drives prices up without a corresponding reduction in volumes.

I just don't see either of these scenarios coming to fruition in the long run. Given economics is all about 'what if' type modelling - shouldn't we be getting more worst-case scenario planning from our corporate and political leaders? Instead we seem to be getting optimistic predictions, with a near certainty of re-jigs downwards. Who is this method of false-hope forecasting benefiting?

by Fairfax O Rouke | 22nd May 12, 11:59am 1337644756

Thanks Kate, you are of course correct in terms of what must happen for a "recovery"to occur, applicable to all commodities you would assume.

In regards to false hope forecasting, dont forget that our entire economic model is based upon the notion of confidence. As in how confident are you that the piece of paper money you have in your hand can be exchanged for goods and services.

I would suggest this is why our political leaders smile and wave a lot, itll be all okay as long as I mince on the cat walk.

by Christov | 22nd May 12, 2:46pm 1337654810

The notion of confidence....in one..! Fairfax O.

Kate was left wondering who benifits by all the hyper posturing while gearing downwards on actuals.

Not so much who ...but the foreign perspective of the NZD as a fairly stable currency is of a premium to certain major players.

The perception of confidence and an economy under control is paramount as you would expect in the best of times.....but

Australia, bursting at the seams with expat kiwis, it will only take a small downturn in China's fortunes for Australia to percieve our lot as a bit of a burden to their economy...and hello to the true unemployment figures of N.Z....inc.

Tipping point...?......I'm just gobsmacked they manage to keep defering it.

It appears it is now far more important to manage the confidence in an economy ...than the economy itself.

by iconoclast | 22nd May 12, 7:07pm 1337670477

Managing confidence - Is this what you had in mind ?

(was watching an EU Banking Analyst being interviewed last night) and he said (of greece) the central banks will say repeatedly over a period of weeks

Do not worry

everything is all right

everything is all right

everything is all right

everything is all right

everything will be all right

everything will be all right

everything will be all right

everything will be all right

everything is going to be all right

everything is going to be all right

everything is going to be all right

everything is going to be all right

until one morning the banks are all closed for an enforced bank holiday

by Christov | 23rd May 12, 8:45am 1337719521

A beautiful demonstration of what I had in mind ...iconoclast...you'd cry if it wasn't so funny.

by tairantei | 22nd May 12, 12:31pm 1337646689

This just makes it clear at the next OCR review interest rates are heading south! Things arn't getting better...?

by Andrewj | 22nd May 12, 1:53pm 1337651601

Last year the forecast payout for this year was $7.15, paid $6.50. 2012/2013 estimate $5.95 payout ...

by Henry_Tull | 22nd May 12, 11:47pm 1337687267

“Farmers ought to have two budgets prepared for their farm; one in the low $5 kg/MS range and the other in the mid to upper $5 range.

“Any budget based upon $6 kg/MS I wouldn’t recommend. The need to be conservative comes with $5.50 kg/MS being Fonterra’s opening 2012/13 season milk price.

“Seeing a new season milk price of $5.50 kg/MS will bring back unhappy memories of the 2008/9 season.....

“We need New Zealand to wake up to the reality that what happens in Europe, America and Asia affects us here eventually,” Willy Leferink concluded.....

http://www.thecattlesite.com/news/38580/fonterra-payout-a-global-econom…

by Micks | 22nd May 12, 2:01pm 1337652084

Looks like Fonterra has taken some of this year's payout and transferred it into next season in an attempt to soften the blow of the lower payout - good old fashioned profit smoothing. Although Fonterra talk about transparency in thier milk price setting, I am more than a little sceptical that they set the price to suit their own purposes. The comment that 20% price falls in April/May (for auctions volumes that mainly get delivered next season) led to the fall in the 11/12 payout are misleading at best.

It would interesting to know when Fonterra are forecasting an improvement in prices and by how much. Implicit in their comments are that things will improve - expect the payout to fall further if they don't.

by Colin Riden | 22nd May 12, 2:44pm 1337654653

Once upon a time Fonterra had long term contracts with fixed prices so forecasts made in Janauary for the current season were usually quite accurate. Now Fonterra have contracts tied to gDT prices. gDT sales are for shorter delivery times and at the moment concentrated short even more than normal (contract2).

The result is that forecast payouts made as late April now have quite large margins of error. Will forecasts made in May still have some room to change?

Fonterra's forecasts for the 2012-13 season appear to be based mostly on hope, and certainly not on current prices and exchange rates extrapolated forward.

by Omnologo | 22nd May 12, 6:50pm 1337669440

Greetings, would such volatility suit the dairy futures market?

by Andrewj | 22nd May 12, 7:33pm 1337671994

so more like wheat?

http://finviz.com/futures_charts.ashx?t=ZW

by Henry_Tull | 22nd May 12, 9:20pm 1337678413

Fonterra increase farmer payout in Oz.?

If one click thru to the abc site, there is some an interview with Heather Stacy the General manager of Milk Supply at Fonterra

http://www.abc.net.au/rural/news/content/201205/s3497990.htm

Prices up for Fonterra suppliers in Vic and Tas

By Tony Briscoe

Tuesday, 08/05/2012

Victorian and Tasmanian dairy farmers who supply Fonterra are getting a price rise for the current season.

Fonterra will increase farmgate milk prices by 8 cents per kilogram of fat and 20 cents per kilogram of protein, with prices backdated to July last year.

Dairy Council chair for the Tasmanian Farmers and Graziers Andrew Lester says the increase caps off a good season for milk producers, and dairy farmers should be happy with the increase.

"There's been a bit of doubt around because of the global dairy trade which is been in decline for the last six months so it looks like people need to make the most of this year because next year we could expect a bit of a drop I'd imagine"

and:

MAY 16, 2012 4:20am Fonterra cites demand for farmgate rise

Fonterra Australia last week announced it will be increasing its farmgate milk price for its Victorian and Tasmanian farmer suppliers.

Prices will rise by 8¢/kg of fat and 20¢/kg of protein (or 13¢/kg of milk solids).

Fonterra’s current farmgate milk price for 2011-12 is now above $5.30/kg of milk solids.......

........ Ms Stacy confirmed Fonterra was under way with budgeting processes for the 2012-13 season.

‘‘We are of course concerned by the softening in commodity prices and we will be discussing our outlook for next season with suppliers in the coming weeks.’’

The latest price increase applies to all current Fonterra suppliers and will be backdated to July 1, 2011.

http://www.mmg.com.au/local-news/country-news/fonterra-cites-demand-for…

Note to self: Milk Price AUD$5.30 x 1.3 equals: NZD$6.89 - ish .....

everythings bigger in Oz...

by Henry_Tull | 22nd May 12, 11:49pm 1337687355

How does this tie in with Oz farmers having a higher farm gate price from Fonterra than here.

Mr Spierings said the improved valuation was mostly due to a significantly higher value for

Fonterra’s Asia-Africa/Middle East consumer business reflecting continued earnings growth.

This was partially offset by a lower enterprise value for the Australia-New Zealand consumer business due to a continuation of challenging market conditions.

https://www.nzx.com/files/attachments/157687.pdf

by Casual Observer | 23rd May 12, 9:41am 1337722885

100 new dairy conversions for the South Island coming on stream next season 2012/13.

by pwilkie | 23rd May 12, 10:02am 1337724127

i wonder if the developers of these 100 farm,s shared dougie,s view of next years payout projection,s as " mildly positive "--doubtful some how i think----

BNZ economist Doug Steel said while the latest cut in this season's payout forecast was heavier than expected, the opening season forecast was "mildly positive".

http://www.stuff.co.nz/timaru-herald/news/6968489/Fonterra-cut-hits-farmers