Fonterra drops milk payout forecast by 30 cents

UPDATE: Disappointed farmers have to accept they're open to the vagaries of global commodity markets, the Fonterra shareholders' council says. 

Softer commodity prices have prompted Fonterra to drop its forecast milk payout 30 cents and lower its opening forecast for the coming season.

In a statement this afternoon, council chairman Simon Couper says the farmgate milk price accounts for 90% of a farmer’s income and is "absolutely critical" to the continued success of each business.

"Farmers will naturally be disappointed," he says. 

“Like most other parts of the New Zealand economy, Fonterra and its farmers are at the mercy of the global economy.

“Farmers need to be prudent in their financial planning.

"Like most New Zealanders, we’ve just got to get on with it and hope things improve – the cows aren’t going to stop producing milk just because the price isn’t where we want it to be.” 

Fonterra, New Zealand's largest company and the world's largest dairy exporter, announced yesterday its forecast farmgate milk price for the current season had dropped 30 cents to $6.05 per kilogram of milksolids, but forecast net profit was unchanged at 40-50 cents a share. 

That reduces the forecast payout range to $6.45-$6.55.

The opening forecast farmgate milk price for the 2012-13 season is $5.50 per kg/ms, reflecting higher global dairy production, the company says.

With a net profit component of 45 cents to 55 cents for the coming season, the total forecast payout is $5.95 to $6.05.

The payout cuts had been expected, given that prices have been dropping in Fonterra’s GlobalDairyTrade auctions, reaching a new three-year low at last week's sale.

The average price has now shed 41% in the past 12 months.

The impact on New Zealand farmers will be offset, however, by the record volumes of milk produced this season and, in the past month at least, a decline in the kiwi dollar.

“Dairy production levels in the US and Europe are high, while we continue to have higher-than-normal production levels from New Zealand.

"All this is occurring at a time of heightened uncertainties in global markets," he says.

Chairman Henry van der Heyden is not sure when prices may recover.

“There’s a lot of milk about and prices have softened,” he said in a statement.

“We think supply and demand should move more into balance later in 2012 which may help ease the downward pressure on prices.”

Fonterra set its fair value share price for the 2013 season at $4.52, unchanged from the current season.

The co-operative said it won’t issue dry shares during the 2011-12 end of season period because it wanted to minimise the risk for its farmers before receiving offer documents and making decisions about the Trading Among Farmers scheme.

They are set to vote again on TAF next month, amid expectations Fonterra will gain a stronger mandate for the restructuring plans.