Fonterra forecasts 63% surge in 2017 organic milk payout

Fonterra Cooperative Group [NZX: FSF] forecast a 63% jump in its payout for organic milk for the 2016/17 season, saying it needed to secure supply in a competitive market where demand is rising worldwide.

The company's opening market-linked organic milk price for next season is forecast at $9.20 per kilogram of milk solids, up from this season's $5.65/kgMS payment.

"The marketplace for organic milk is very competitive and the market-linked organic milk price will help Fonterra to secure a steady stream of organic milk," said Paul Grave, head of cooperative affairs for Waikato.

In February, Fonterra announced it would offer its organic dairy farmers a payout based on market returns for the first time starting next season in a bid to boost organic supply as competition and consumer demand increase. The current season's payment is based on a $1.75/kgMS premium to the payout for regular milk, which is forecast at $3.90/kgMS, and is well below Dairy NZ's estimated $5.25/kgMS level needed by the average farmer to break even.

For 2016/17, organic farmers will have the choice of taking a share of market returns from their milk or sticking with the existing premium.

"Increasing demand for organic milk products, and organic food in general, is leading to high prices for these products in international markets," Mr Grave said. "While global milk prices have been volatile recently, prices for organic dairy ingredients have remained at the same relatively high levels since 2013/14. Organic milk prices are high because consumers' appetite for organic milk products is growing faster than supply."

Fonterra's organic suppliers dropped to 60 from 73 in the past year with the emergence of the rival Organic Dairy Hub last year, which had 15 suppliers as at February, including some who also supplied Fonterra.

Fonterra has had a rocky history with organic farmers after blowing hot and cold on its formerly unprofitable organic milk business in the past.

Organic milk comprises less than 1% of Fonterra's milk supply. Its organic milk strategy, released last year to show farmers the cooperative was committed to the business, aims to increase supply to 600,000kg/MS by 2020.

(BusinessDesk)