Forecast slash costs farmers $3.3b

By Owen Hembry

Plummeting global dairy prices costing farmers billions are bottoming out, dairy giant Fonterra says, but don't hold your breath for relief this year.

The world's biggest dairy exporter yesterday dropped its forecast payout to farmers this season by 90c to $5.10 per kg of milksolids.

This season's payout could represent a drop worth about $3.3 billion from last season's record available payout of $7.90 per kg - of which 24c was retained to protect the balance sheet.

The average price of whole milk powder in Fonterra's online auction has dropped 54 per cent since July, while the ANZ Commodity Price Index for dairy products has fallen by about half since peaking in November 2007.

Kelvin Wickham, Fonterra managing director globalTrade, said current prices were nearing the bottom of the cycle.

"If you look at where we are today what we're saying is we're heading towards the bottom now, the signs are the supply is buttoning off, demand is picking up but we're not going to come out of that until 2010," he said.

Chief executive Andrew Ferrier said the environment looked more negative than before Christmas.

"What we're seeing now is milk powder prices trading significantly below where they were in December and that's now been strongly impacted by the European Union coming in talking about subsidising milk products," Ferrier said.

The outlook was for tough times during the next 12-18 months, he said.

"We do think that these lower prices will bring demand back, it'll burn off the incremental stock and it will gradually return to more reasonable levels."

Criticism that Fonterra's online auction system was helping drive down prices was absolute nonsense, Ferrier said.

"If you look overall, all soft commodities and most hard commodities have been falling materially since late 2007," he said. "Dairy is no different than anybody else."

Susan Kilsby, head dairy sector analyst for NZX Agrifax and Dairy Week, said the online auction had provided a transparent means to see the price for whole milk powder and insight into the direction of the market.

The introduction of the system in July last year coincided with the decrease in world commodity prices but had not driven the decrease, she said.

"To blame global dairy trade for the fall in prices is to ignore the market factors that have colluded to create the current price decline for dairy commodities."

Prices would come back but not until demand returned.

"In the current tough economic climate, combined with the re-introduction of subsidies [in the EU], it could be well into 2010 before prices rebound."

Fonterra said the value add part of the forecast payout had increased by 5c to 45c because of improved margins in its international ingredients and overseas consumer businesses.

However, the April payment of the value return would be deferred to a single lump payment expected in October.

Chairman Henry van der Heyden said the board was conscious that the deferred payment would impact farmers' cashflows.

"But we need to be prudent given ongoing market uncertainty and the need to maintain a strong balance sheet," he said.

"For this same reason the board is reserving its position on retentions [from the payout]."

The company had a good market presence, position and strong relationships with customers, van der Heyden said.

"As a matter of fact I think we'll actually be able to capitalise and come out of this recession in very good shape and definitely in better shape than our competitors."

Shareholders' Council chairman Blue Read said the scale of the drop would surprise many farmers.

"After a record payout last year, we went into the season with a payout forecast of $7 per kg of milksolids," Read said.

"We are now confronted by a reduction of more than 25 per cent in our farm revenues for the season."

Federated Farmers Dairy chairman Lachlan McKenzie said the reduced payout was disappointing but not a calamity, with the fundamentals for dairy still extremely good.

"This comes at a time when there is a glimmer of light appearing at the end of the tunnel for other commodities and the revised payout is still the third best payout this decade," McKenzie said.

"While the revised payout will be tough on some farm businesses, the majority are well managed and moderately geared."

- NZ Herald

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