Fonterra lifts forecast for this season’s local milk supply

Fonterra Cooperative Group [NZX: FCG], the world's biggest dairy exporter, anticipates bigger growth in milk supply this season with dry conditions not as bad as last year's drought, and the incentive of a higher forecast farmgate pay-out.

New Zealand milk volumes are forecast to rise 7.5 percent to 1.57 million kilograms of milk solids in the 2013/14 season, up from a previous expectation of 6.4 percent growth, Fonterra said in a statement. Based on the forecast payout to farmers of $8.65 per kgMS, that implies Fonterra will pay some $13.61 billion to source local milk in the season. Fonterra's New Zealand-sourced milk costs were $8.64 billion in the year ended July 31, 2013, when it paid $5.84 per kgMS to farmers.

The Auckland-based company collected 151 million kgMS in February compared to 137 million kgMS a year earlier when the North Island was in the grip of the worst drought in seven decades. Total collection in the season to date was up 4.9 percent to 1.27 million kgMS.

"While we are seeing dry conditions impact some regions of the country, particularly Waikato and Northland, these are not as widespread as the same time last year," Fonterra said. "The lift in Forecast Farmgate Milk Price may have a positive influence on milk supply increasing above our previous forecast."

Fonterra's board has kept the increase in the forecast payout 70 cents lower than what it would be using calculations from the regulated milk price manual, due to a production mismatch where the price of whole and skim milk powder surged ahead of higher margin products such as cheese and butter.

In December, Fonterra said it was limited by its plant configuration on how much milk powder it can produce, with about 70 percent of production capacity for milk powder and the remainder making cheese and casein.

Last week Fonterra said it would give an update on the business when it reports its first-half result on March 26. It has previously forecast 2014 earnings before interest and tax to fall to between $500 million to $600 million from normalised EBIT of $1 billion in 2013.

Units in the Fonterra Shareholders' Fund, which gives investors exposure to the company's dividend stream, gained 0.8 percent to $5.98, and have increased 2.2 percent this year.

(BusinessDesk)