Fonterra cut bitter pill for farmers

Photo / Bloomberg

The Fonterra Shareholders Council said today's announcement of a further 25 cent drop in this season's farmgate milk price - to $3.90 a kg of milk solids - was a bitter pill for farmers to swallow .

Council chairman Duncan Coull said the drop reflected current market conditions.

"Farmers understand what the market realities are and continue to make adjustments where they can, but today's announcement, coming so close on the heels of January's 45 cent milk price reduction, will magnify the effects on our farmers' businesses," he said in a statement.

"This current environment is no doubt placing added personal stress on farm so it's imperative we keep in touch with our neighbours, friends and families, and all support each other where we can," he said.

The council represents the interests and views of Fonterra's farmers to the co-operative's board.

Radio New Zealand reported suppliers were unhappy with Fonterra extending the time it time it takes to pay suppliers by two months.

National's Whanganui MP Chester Borrows told Radio New Zealand Fonterra had also asked for a 10 per cent cut, and 20 per cent cut in some cases, in what suppliers charged it.

The New Zealand dollar dropped by a quarter of a US cent on the back of news.

The currency fell to US67.73c after trading at about US$68.0c just before the release.

"The New Zealand dollar was under pressure just ahead of the announcement, so it has just contributed to that," ANZ senior economist Phil Borkin said.

"Part of the reason the market has not reacted more is that it has probably brought Fonterra closer to where the market expectations were, rather than it being a major suprise," he said.

Fonterra's dividend guidance is unchanged, implying a cash payment to fully share-backed farmers of $4.25-4.30 this season.

Dairy prices rose in the latest GlobalDairyTrade auction, and world commodity prices in general are now benefitting from improved risk sentiment, but these developments will likely be too late to support this season's payout, Westpac said in a commentary. "This latest downgrade will come as a disappointment to farmers, and could see business confidence slide further in coming months," the bank said.

At $3.90, the milk, price is well below industry body Dairy NZ's estimate of $5.25/kgMS as the level needed by the average farmer to break even, and just 5 cents higher than Fonterra's first forecast for the season when the cooperative rolled out interest-free loans to its supplier-shareholders to help them through the season.

"The time frame for a rebalancing has moved out and largely depends on production reducing - particularly in Europe - in response to these unsustainably low global dairy prices," chief executive Theo Spierings said in a statement.

"Our forecast is based on no significant changes to either supply or demand globally before the end of the year.

"However, a reduction in the supply available before then could mean prices recover earlier than currently expected."

Dairy prices have declined in all but one of Fonterra's GlobalDairyTrade auctions this year as global production continued to expand, helping build up stocks around the world.

Fonterra expects its own milk production to be at least 4 percent lower than the previous season, with local farmers culling herds and reducing supplementary feed.

Chairman John Wilson said the cooperative's management is focused on stripping out costs "and our balance sheet strength will provide opportunities to support our farmers' cash flows."

Fonterra's credit rating was cut last year after it racked up debt to take a cornerstone stake in Chinese processor Beingmate Baby & Child Food Co and offered its farmer shareholders interest-free loans to tide them through a downturn, while at the same time contending with the slump in global dairy prices.

-with BusinessDesk

See the latest Fonterra release here: