Fonterra announces an opening forecast Farmgate Milk Price of NZ$7 per kgMS for the 2013/14 season - up NZ$1.20 on the current season

Fonterra Co-operative Group has announced an opening forecast Farmgate Milk Price of NZ$7 per kg of milk solids for the 2013/14 season - up NZ$1.20 on the current season.

In addition, it announced a higher Advance Rate schedule, with an opening rate of NZ$5 per kgMS, reflecting the higher forecast milk price for next season.

Fonterra also confirmed it is holding its current milk price for the 2012/13 season at NZ$5.80 per kgMS and a forecast dividend of NZ32 cents a share, making for a cash payout of NZ$6.12 for a fully shared-up farmer.

The board will announce its forecast cash payout for the 2013/14 season, which is comprised of the forecast milk price and dividend, in July after Fonterra's budget is completed and approved.

Chairman John Wilson said the higher forecast milk price for the new season reflected continuing strong international prices for dairy.

"The general consensus is that dairy commodity prices have peaked but will continue at or near current levels until the fourth quarter of 2013. Most external forecasts point to prices remaining relatively strong through 2014."

Regarding the Advance Rate increase he said: "A stronger forecast Farmgate Milk Price, supported by our improving cash flows and strong balance sheet, means we are able to lift the Advance Rate for the new season to ensure farmers receive higher payments for their milk early in the season.

"A large proportion of our farmer shareholders have experienced drought conditions, which have had a significant impact on feed costs and production, resulting in early drying off of their herds.

"A higher Advance Rate at the start of the new season will help our shareholders in managing their farming businesses to ensure an ongoing supply of high quality milk to the co-operative," Wilson said.

Referring to the current season forecast, Wilson advised farmers to be cautious in managing their budgets as there had been a sharp drop in milk volumes as a result of the drought and there had been recent declines in GlobalDairyTrade auction results.

Fonterra's chief executive Theo Spierings said that in the global milk market  the "fundamental supply and demand balance has shifted".

Production slowing

He said global milk production growth was slowing as a result of unfavourable weather conditions in many key milk production regions.

"Although we are seeing modest production growth in the USA, recent cold conditions in Europe have had a negative impact on crops and dairy, and the outlook remains mixed.

"Milk production growth in 2013 for the top 15 exporting countries is projected at 0.5 per cent or 1.2 billion litres - well below the 1.8 per cent (4.5 billion litres) growth levels we saw in 2012."

In general, the global economic outlook remained steady but with some downside risk, he said.

In the US modest growth continued, while China had managed a "soft landing" with the consensus on growth there at around 7.8%.

"While we expect most farmer shareholders will welcome a higher milk price, we will continue to closely monitor these key factors contributing to Fonterra's opening forecast for the 2013/14 season."  Spierings said.

Fonterra was currently preparing its budgets for 2014, however, shareholders and unit holders should expect the strong uplift in international dairy powder prices to create a more "challenging environment" for Fonterra's earnings in the first half of the 2014 financial year, he said.

Raw Milk Regulations

Meanwhile Wilson commented on changes to the Raw Milk Regulations, applying from June 1.

"This season is the last when competitors can cherry pick when they get milk during the season, and it has coincided with the drought and the recent higher export prices.

"This meant Fonterra was required to supply large volumes of milk to competitors when milk flows were very low because of the drought, reducing the utilisation of our factories.

"At current prices, we estimate that the milk we have supplied our export competitors from March to May will cost our shareholders about NZ$25 million in lost earnings, amounting to 1.5 cents per share in lost earnings.

"At the same time we estimate that due to the drought the benefit to our competitors is far greater, with the potential to add between 5 - 30 cents per kgMS to their performance.

"As this year's drought has shown us, the Government did the right thing in changing the Raw Milk Regulations last year," Wilson said.