Fonterra cuts payout forecast

Fonterra is rebalancing after the fall in prices. Photo / Christine Cornege

Fonterra has issued its 2015/16 farmgate milk price forecast at $5.25 per kg of milk solids and has cut its forecast for the current season, which ends on Sunday, by 10c to $4.40 a kg.

Analysts had expected the co-operative to pitch its 2015/16 forecast at close to $5.00 and said there was an outside chance the current season's forecast would be reduced.

Along with its previously announced forecast dividend range of 20-30 cents per share, farmers will face a cash payout of $4.60 - $4.70 a kg for the current season.

Fonterra said in a statement its advance payment for the next season would come to 3.66 a kg.
At $4.40, the current seasons' farmgate milk price is the lowest in eight years.
Chairman John Wilson said the downwardly revised forecast reflected the reality that global commodity prices had not increased as expected.

"World markets are over-supplied with dairy commodities after farmers globally increased production in response to the very good prices paid 12-18 months ago," he said in a statement.
"This supply imbalance has heightened due to continuing good growing conditions in most dairy producing regions," he said.

Wilson said the forecast farmgate milk price was based on Fonterra's best view of long-term global dairy supply and demand.

"We can expect prices to recover going forward, and to see a rebalancing of supply and demand over the season," he said.
"However it is more difficult this early in the season to determine exactly when this recovery will lead to a sustained price improvement," Wilson said.

ANZ Bank said the Reserve Bank should respond to Fonterra's low farmgate milk prices by cutting the official cash rate in June and July.

Fonterra earlier announced an opening milk price for the 2015/16 season of $5.25 kg of milksolids, which was broadly in line with ANZ's expectations, and reduced its 2014/15 price by a further 10 cents to $4.40/kg.

Importantly for farmers, Fonterra set an opening advance of $3.66/kg which, on top of low deferred payments from last season, reinforced considerable cash flow pressure on the sector, ANZ said.

"The dairy sector is at the vanguard of the shifting risk profile facing the economy and given low inflation, we believe the Reserve Bank should be responding to these growing risks by delivering insurance-type rate official cash rate cuts in June and July," the bank said in a commentary.

The Reserve Bank's cash rate is currently set at 3.5 per cent.

Chief executive Theo Spierings said the long-term fundamentals of global dairy demand were strong. "Given the season we are coming out of, we are absolutely focused on improving farmer returns and driving the Co-operative's performance," Spierings said.

Fonterra Shareholders' Council chairman Ian Brown said farmers would be cautiously optimistic about the season ahead.

"Farmers will view next season's forecast as a positive given the situation we have experienced this past season," he said.

On Wednesday, Hokitika-based Westland Milk said its farmer payout for 2014-15 would remain at $4.90-5.10 per kg of milk solids - before retentions. Westland set next season's payout forecast at $5.60 to $6.00 per kg.