ANZ cuts 2014/15 Fonterra payout forecast to $4.35/kgMS

ANZ Bank New Zealand has further cut its forecast payout to Fonterra Cooperative Group's [NZX: FCG] shareholder farmers in the 2014/15 season to $4.35 per kilogram of milksolids, adding almost a billion dollars more to the hit it expects falling dairy commodity prices to have on the New Zealand economy, although it still anticipates a price recovery late in the 2015/16 season.

The bank, which today became the first announce measures for drought-stricken farmers, had previously been forecasting $4.75/kgMS, against a current Fonterra for the season of $4.70/kgMS, announced just before Christmas, which was estimated to reduce farmer incomes by $6 billion from the previous season's record high payout of $8.40/kgMS.

Since February last year, dairy commodity prices at global auction have fallen by more than half as the previously insatiable Chinese market paused to run down stocks, European and US producers upped production, and banning European Union dairy commodity sales to Russia saw additional product flood onto the global market.

"We also anticipate a softer opening price for 2015/16 to be announced in May, around the $5.75 per kg/MS (previously $6.50/kgMS) although we expect a further uplift toward the low $6kgMS mark by the end of the season," the bank's economists said in a note ahead of the next GlobalDairyTrade auction tonight.

Factors weighing on the payout include an expectation the New Zealand dollar will stay strong, that dairy prices will recover more slowly than previously anticipated, the growth in supply from other producers is the largest in eight years, and Chinese domestic milk production appears to have increased.

"While current international prices are below the cost of production, it is taking longer than expected for these to feed through to all major markets and farm prices," the bank says, noting also that "we are becoming more and more alert with each passing day to a weakening global scene."

"The next 18 months will be difficult for farmers' cashflow and ability to balance the books", particularly in regions affected by dry weather that is developing into a drought.

"It will necessitate a cut in not just capital and discretionary expenditure, but also core operating expenditure to break even and avoid a debt blowout", creating some "gestation issues around the country."

However, if globally traded milk supply slows as expected in response to much lower prices, ANZ says global auction prices may rise by between 30 and 40 percent by the second half of this year.

"We project milk powder prices to recover to around the US$2,800 to US$3,000 a tonne mark by the middle of the year and then US$3,300 to US$3,500 per tonne by early 2016. At the last GDT auction, on Jan. 6, the average price per tonne rose 3.6 percent to US$2,709.

(BusinessDesk)