Fonterra chairman John Wilson. Picture/NZ Herald.
Dairy farmers will still make money at Fonterra's lower farmgate milk price, but they will be keeping an eye on costs if the dry weather persists, economists say.
As expected, the co-operative today cut its milk price forecast for the 2017/18 season from $6.75 to $6.40 per kg - still well above DairyNZ's estimated break even point of $5.20 to $5.25/kg and last year's price of $6.12/kg.
Chairman John Wilson said the lower forecast reflected a "prudent approach" to ongoing volatility in the global dairy market, the GlobalDairyTrade price for whole milk powder having dropped by almost 10 per cent since August.
Fonterra last week said it would pay French food group Danone $183 million in compensation for product recall losses incurred during the 2013 botulism scare.
The payment meant Fonterra had to revise down its forecast earnings per share range for the 2017/18 financial year to 35c to 45c, down from 45c to 55c. The co-op's dividend is expected to fall by a similar amount.
Wilson said that despite demand for dairy remaining strong - particularly in China, other parts of Asia and Latin America - Fonterra was seeing strong production out of Europe and continued high levels of EU intervention stockpiles of skim milk powder.
The downward pressure on global prices is being partly offset by the lower NZ-US dollar exchange rate, he said.
Wilson said Fonterra's strong financial position, customer order book at this point in the year, and confidence in demand meant that the board is able to increase the payments made in January by 10 cents per kg and will hold the advance rate through to the payments in May.
"In effect, our farmers will receive equal or higher payments for their milk over this period than were scheduled under the previous $6.75 milk price," he said.
ASB Bank rural economist Nathan Penny said it looked like Fonterra was taking "a dollar each way" approach with a low milk price, coupled with a high advance rate.
Con Williams, ANZ Bank's rural economist, said most farmers would be making "pretty good money" around the mid-six dollar mark but many would face higher feed costs if dry conditions persist.
Fonterra has also reduced its forecast production by 1 per cent to 1.525 million kg – the same volume as last season - due to "challenging" weather conditions.
In its financial update, Fonterra's first quarter revenue of $4 billion is up 4 per cent on the same period last year.
Sales volumes are down 20 per cent to 3.9 billion liquid milk equivalent (LME), while the gross margin of 16.7 per cent was also down.
Chief executive Theo Spierings says the first quarter financial results were generally as expected as the co-operative started the year with record low inventory followed by the second year of low spring milk collections from New Zealand due to wet weather.
The gross margin in consumer and food service fell to 24 per cent in the first quarter from 31 per cent a year earlier.
Spierings said Fonterra is confident of meeting its full-year forecasts following revisions after the recent Danone announcement.
At current levels Fonterra's revised milk price well above the recent slump.
Farm balance sheets came under severe pressure when prices slumped to $3.90/kg in the 2014/15 season and to $4.40/kg in 2015/6 - well below most farmers' break even points.
Sharply lower prices saw Fonterra offer a soft loan scheme to help farmers through the downturn.