Fonterra took a step closer to breaking even in Australia yesterday after it cut its farmgate milk price to fall more in line with the key price setter there, Murray Goulburn.

Fonterra - which competes head-to-head with Murray Goulburn - said it had cut its Australian milk price to A$5 per kg of milksolids from A$5.60, which better reflected the reality of the supply and demand imbalance affecting global dairy commodity prices, compounded by the strength of the Australian dollar.

The co-operative said it was sticking with its 45c to 55c earnings per share forecast, despite the improvement across the Tasman.

Fonterra Australia is also offering its suppliers an interest-bearing support loan of up to 60c/kg that is linked to a supply commitment and is repayable from 2018. It is understood the deal locks Aussie farmers in to supplying Fonterra for four years.


The revised milk price will reduce the cost of goods sold for Fonterra Australia by around A$48 million, but this will be subject to a number of factors including final milk volumes for the year.

"This will contribute to the reduction of operating losses in our Australian Ingredients business this financial year," Fonterra said.

Fonterra's current earnings guidance reflected a range of possible impacts through to the end of the financial year including the completion of announced business sales in Australia.

Murray Goulburn, Australia's biggest dairy company, said last week its farmgate milk price of A$5.60/kg of milksolids was no longer achievable. It now expects a price of A$4.75 to A$5/kg to be paid this year.

In February, the company forecast its annual net profit would come in at A$63 million against a prospectus forecast of A$89 million.

Last week Murray Goulburn said it expected its net profit to be A$39 million to A$42 million, triggering the resignation of managing director Gary Helou and chief financial officer Brad Hingle.

Forsyth Barr analyst James Bascand said paying a more reasonable price for milk in Australia would make for a welcome change for Fonterra's Australian operations.

He expected Fonterra's Australian operation's earnings before interest and tax to increase by $25 million, which would take it closer to break-even.