Fonterra may cut 2012 payout, banks say

Photo / Christine Cornege

Fonterra, the world's largest dairy exporter, may cut next season's farmer payout by about 13 per cent as New Zealand's currency strengthens, ASB Bank and BNZ have said.

The company may pay its 10,500 farmer shareholders $7 a kg of milk solids in the year ending May 31, 2012, James Shortall, a rural economist at ASB, said by phone. It may be as low as $6 a kg, Doug Steel, markets economist at BNZ, said in a separate interview.

New Zealand is relying on exports, which make up about 30 per cent of the economy, to buoy a recovery from the Christchurch earthquake in February. The gain in the so-called kiwi cuts earnings for companies that incur costs in the local currency and earn revenue in dollars.

"The potential of the New Zealand dollar trading around 80c and even going higher later on this year, we think that's going to impact on payout," Shortall said.

The kiwi has climbed 6.2 per cent versus the US dollar in the past two months, the best performance among 31 major currencies, according to Bloomberg data. Fonterra accounts for about one-fifth of New Zealand's export revenues.

"On currency effects alone, you would expect the best part of $1 to be lopped off," Steel said.

Fonterra increased this season's forecast payout range before retentions to $7.90 to $8 on February 22, citing rising global dairy prices. Whole milk powder prices jumped to a record $4958 a tonne on March 1. Powder reached $4008 a tonne at auction on May 3.

"Prices will stay strong, but probably at current levels as opposed to moving higher, which they would need to do to match last year's payout," Shortall said.

Reserve Bank of New Zealand Governor Alan Bollard said yesterday the kiwi was "undesirably high" against the greenback and the economy would perform better if the exchange rate fell.

Fonterra is required to release its share price for the 2011-2012 season before it begins on June 1, according to legislation.

- BLOOMBERG