Jamie Gray is a business reporter for the New Zealand Herald and NZME. news service.

Dollar dips as Fonterra cuts dairy payout forecast

Fonterra is cutting its forecast payout by 15c, due to lower world prices and the strength of the kiwi dollar. Photo / Sarah Ivey
Fonterra is cutting its forecast payout by 15c, due to lower world prices and the strength of the kiwi dollar. Photo / Sarah Ivey

The New Zealand dollar dipped slightly after Fonterra announced a 15c per kg reduction in its forecast payout for 2011/12, but financial markets mostly took the news in their stride.

The currency dipped to US81.74c on news, down from US82.05c earlier in the morning, before recovering to just over US82 before midday.

"There's been no lasting effect but there was a knee-jerk reaction to the news," Westpac currency strategist Imre Speizer told APNZ.

The farmer owned-milk cooperative said earlier that it had revised its payout forecast for the 2011/12 season to $6.75 to 6.85 per kg of milk solids, down 15 cents from is previous forecast, due to declining commodity prices and the stronger New Zealand dollar.

The revised forecast comprised a lower Fonterra farmgate milk price of $6.35 per kg milksolids, down from $6.50.

The season's distributable profit range forecast of $570 to $720 million, equating to 40-50c per share, remained unchanged, Fonterra said.

Overall, the global dairy trade-weighted was down 5.7 per cent since December 13, when the forecast of $6.50 per kg was announced.

The New Zealand dollar's continuing strength, higher levels of global milk production, and uncertainties in international markets had led to the lower forecast.

Fonterra's chef executive Theo Spierings said the trend was for stronger global dairy production to continue into this year.

"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," he said in a statement.

"International milk powder demand, however, currently appears robust, which should help offset the impact of the stronger milk supply growth," he said.

Spierings said global markets were 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 added that commodity prices were likely to remain under some pressure through to mid-2012.

ASB Bank chief economist Nick Tuffley said little could be read into the cut in the forecast payout.

"It really puts the payout about 5c above where it was in December before it was tweaked up," he said.

"In some ways global dairy prices have been fairly resilient given the increase in production that's been coming through," he said.

Tuffley said he expected the strong New Zealand dollar to become "much more of a headwind" for the dairy giant in the year ahead. In the big picture, he remained positive about dairy's prospects.

"Our view is that we are likely to see global dairy prices remain pretty elevated over the long term," he said.

"Short term, there has been a surge in supply - and that's certainly the case here in New Zealand - and at the moment we are dealing with a high currency, which we expect to go higher," Tuffley said.

Fonterra will announce its interim results and dividend on March 29.


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