Fonterra cuts Australian farmgate milk price, offers loan to farmers

Fonterra Cooperative Group [NZX: FSF] cut its forecast farmgate milk price to its Australian dairy farmers for the current season, saying it better reflects the oversupply of milk which is weighing on global dairy commodity prices. It also offered those farmers a loan linked to future supply.

The dairy processor will pay its Australian farmers $A5 a kilogram of milk solids, down from an earlier forecast of $A5.60/kgMS, the Auckland-based company said in a statement. It also offered its Australian suppliers an interest-bearing support loan of as much as 60Ac/kgMS, linked to a supply commitment and repayable from its 2018 financial year.

"The price change better reflects the reality of the supply and demand imbalance that is affecting global dairy commodity prices, compounded by the recent strength of the Australian dollar," the company said. Chief executive Theo Spierings caused a stir last August when he said Australian dairy farmers were being paid too much for their milk, which didn't reflect the collapse in global prices.

Fonterra, the world's largest dairy exporter, is reducing payments to its farmer suppliers as it grapples with weak dairy prices, which have remained lower for longer than expected as global supply continues to exceed demand. It has already reduced payments to its New Zealand suppliers to $3.90/kgMS for the current season, which is below the cost of production for most. It supported its cash-strapped New Zealand farmers with an interest-free loan scheme that cost it $390 million and stretched its balance sheet, and has brought forward payment of its final dividend to get money into farmers' hands as quickly as possible.

The company said today that its revised Australian milk price would reduce the cost of goods sold for Fonterra Australia by about $A48 million although the amount is subject to factors such as final milk volumes for the year.

"This will contribute to the reduction of operating losses in our Australian ingredients business this financial year," it said

The Australian business has underperformed for several years in an environment of fierce competition for milk supply and over-capacity in dairy production. Fonterra's head of Australian operations, Judith Swales, said in November that the unit should become profitable in the next year as it shifts its focus from low-priced skim and whole milk powders, which will be produced in New Zealand, to nutritional milk powders such as infant formula, whey and specialty cheeses such as mozzarella.

Most of Fonterra's Australia suppliers are members of the Bonlac Supply Company, a collective which negotiates prices with the cooperative and acts as an agent for supplying it milk. Under a 2005 supply agreement, later extended to 2019 before Swales joined, Fonterra has to buy all milk from BSC shareholders that meets its standards and match or better the price paid by the dominant processor – Murray Goulburn. It doesn't, however, lock in farmers to supply Fonterra.

Today's cut to Fonterra Australia's farmgate milk price comes after Murray Goulburn announced last week it would borrow to pay its farmers $A5.47/kgMS this year, down from the promised $A5.60/kgMS and a hoped for $A6.05/kgMS. Its chief executive, chief financial officer and two directors have resigned.

Fonterra today said it maintained its current earnings guidance range of 45-55c per share.

Units of the Fonterra Shareholders' Fund slid 0.2% to $5.79, and have decreased 3.2% this year.

(BusinessDesk)