Fonterra payout cut surprises - but forecast rosier

A price drop for NZ farmers was expected after milk from Europe and the US bumped up world supply. Photo / Christine Cornege

Depressed prices on the global dairy market have forced Fonterra to revise down its forecast payout for the current season by 30c per kg of milksolids.

At the same time, the dairy cooperative fired off its first forecast for the 2012/13 season, which was for a payout in a range of $5.95 to $6.05 per kg.

While the severity of the cut for the current season - to a range of $6.45 to $6.55 per kg - came as a surprise, the outlook for 2012/13 was better than many had expected, which meant the currency impact of the announcement from New Zealand's biggest exporter was neutral.

Fonterra said its forecast for 2012/13 reflected higher dairy production around the world flowing through to lower international dairy prices.

The news is likely to be greeted with some relief by farmers, given the way world dairy prices have fallen in recent months, BNZ agricultural economist Doug Steel said.

Steel said the 30c cut for the season just ending was on the high side, but he said the forecast for 2012/13 was better than many had expected, given the sharp declines in global prices and the persistent strength of the New Zealand dollar.

But he said that at the $6.00 mid-point, the payout for 2012/13 was still above the 10-year average of $5.56 per kg.

"Farmers will be relatively happy with the starting point at around $6.00," Steel said.

"Sure, it's down from last year and from the year before that, but it could have been worse," he said.

The fact that Fonterra moved to cut its forecasts came as no surprise, considering the Global Dairy Trade trade-weighted index has fallen by 20.3 per cent since Fonterra's last farmgate price forecast of $6.35 per kg in April.

The updated forecast payout range for this year comprised a lower forecast farmgate milk price of $6.05 per kg and a forecast net profit range of $570-720 million, equating to 40-50 cents per share.

"Dairy production levels in the US and Europe are high, while we continue to have higher-than-normal production levels from New Zealand," chief executive Theo Spierings Spierings said in a statement. "All this is occurring at a time of heightened uncertainties in global markets," he said.

Fonterra chairman Sir Henry van der Heyden said the opening forecast for 2012/13 reflected a realistic outlook by the board towards global dairy markets over the coming season.

"There's a lot of milk out there and prices have softened," he said.

"We think that supply and demand should move more into balance later in 2012 which may help ease the downward pressure on prices," van der Heyden said.

"However, there is no consensus among outside experts on how soon we can expect to see prices recover so it is important that we give our best possible estimates to farmers so they can plan accordingly," he said.

Fonterra is preparing its budget for the 2012/13 year and is targeting a net profit in a range of $670m $820m, equating to 45-55c per share.

The board has yet to forecast a dividend range for 2013, but the Fonterra's dividend policy is to pay out 65-75 per cent of net profit.

Imre Speizer, senior market strategist at Westpac, said there was no currency impact arising from the announcement.

"I think that was because of the net effect of the two seasons offsetting each other." he said. "We had a disappointment for the current season but a positive surprise for the next season." The New Zealand dollar was steady at US76.67 just before and after the mid-morning announcement.

The 2012/13 price will not be finalised till October next year.