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Current as of 23/09/16 08:19AM NZST
Jamie Gray is a business reporter for the NZ Herald

Fonterra cuts farmer milk payout

Fonterra chairman John Wilson, left,  with Fonterra CEO Theo Spierings. Photo / Jason Oxenham.
Fonterra chairman John Wilson, left, with Fonterra CEO Theo Spierings. Photo / Jason Oxenham.

Fonterra has cut its farmgate milk price forecast for the 2015/6 season to $4.15 a kg of milksolids from a previous forecast of $4.60 a kg in response to weak international prices.

Combined with the earnings per share range of 45-55 cents, the total available for payout of $4.60-$4.70 per kg would currently equate to a forecast cash payout of $4.50-$4.55 per kg for farmers, it said.

Chairman John Wilson said global economic conditions continue to be challenging and are impacting demand for a range of commodities, including dairy.

"Key factors driving dairy demand are declining international oil prices which have weakened the spending power of countries reliant on oil revenues, economic uncertainty in developing economies and a slow recovery of dairy imports into China," he said in a statement.

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In addition, the Russian ban on European Union dairy imports continued to push more product on to the world market, Wilson said.

ASB Bank said in a commentary that Fonterra's move to $4.15 was in line with its expectations. "However, our long-run dairy view remains positive," the bank said. "Current low prices are unsustainable and, as producers respond to low prices in earnest, prices will lift over the year," it said.

The bank said it expected the milk price to lift to $6.50/kg next season.

The Fonterra Shareholders' Council said the co-operative's 45c cut in its farmgate milk price for 2015/6 was a "sobering blow" for farmers.

Council chairman, Duncan Coull, said the cut in the farmgate Milk Price, from $4.60 kg/MS to $4.15 kg would "further amplify" the effects of the current low milk price environment on Farmers and their businesses.

Farmers are very aware that this is a global story which is now having a significant local effect.
Fonterra Shareholders' Council chairman Duncan Coull

DairyNZ estimates break-even point for farmers to be at $5.40 a kg of milksolids and today's announcement means farmers are likely to face two consecutive years of sub-$5 prices.

"Farmers are very aware that this is a global story which is now having a significant local effect," Coull said in a statement.

"Strong supply out of Europe coupled with flat demand is driving market sentiment as evidenced by the GlobalDairyTrade results," he said.

Fonterra chairman Wilson said there was an imbalance between supply and demand which continued to put pressure on global milk prices.

Since last September, prices on GlobalDairyTrade for whole milk powder has fallen by 12 per cent, and skim milk powder prices are down 8 per cent.

These prices are clearly unsustainably low for farmers globally and cannot continue in the longer term.
Fonterra chief executive Theo Spierings

Chief executive Theo Spierings said that while global demand remained sluggish, but that Fonterra supported the general view that dairy prices would improve later this calendar year.

"However the time frame for supply and demand rebalancing has moved further out and largely depends on a downward correction in EU supply in response to the lower global prices," he said.

"These prices are clearly unsustainably low for farmers globally and cannot continue in the longer term," he said. While global issues were affecting the milk price, Fonterra's the business was performing well, and was on track to generate improved dividend returns, he said.

Hokitika-based Westland Milk Products, New Zealand's second biggest dairy co-operative after Fonterra, this week moved it forecast the 2015/16 season because of a 15 to 25 per cent fall in prices across all its commodity products. The new payout forecast is in a range of $4.15 - $4.45 per kg from a previous forecast of $4.90 to $5.30.

OpenCountry Dairy, New Zealand's second largest dairy processor after Fonterra, has already reduced its milk payout by 30c to an average price of between $4.00-$4.30 per kg milk solids.

The dairy companies forecasts' follows soft prices at last week's GlobalDairyTrade (GDT) auction, where GDT price index eased 1.4 per cent following on from a 1.6 per cent decline at the first sale of the year.

Wholemilk powder, a key product for determining Fonterra's farmgate milk price, last traded at US$2188 a tonne, well short of the US$3000 a tonne required for the previous $4.60 kg forecast to be met.

- NZ Herald

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