Fonterra's 2016 forecast milk payout tied to dairy prices recovery

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Fonterra [NZX: FCG] has affirmed its guidance for the 2016 milk payout to farmers, although chairman John Wilson says it is dependent on global dairy prices rising in the first half of next year from current unsustainable levels.

The world's largest dairy exporter has forecast a farmgate milk price of $4.60 per kilogram of milk solids and a cash dividend of 35-40c per share for a total payout of $4.95/kgMS to $5/kgMS.

Fonterra has faced a challenging year globally with low dairy prices and a continued imbalance in supply and demand, which had a strong impact on the 2015 payout,

Mr Wilson told shareholders at their annual meeting at the company's Waitao UHT factory in the Waikato today, it was disappointing the payout was only the third-highest among New Zealand's dairy companies.

He says there are three priorities for the coming year - lifting the dairy payout, driving higher returns for Fonterra, and reviewing the governance structure, which had been put on hold in recent years while the company focused on maximising returns and cutting costs at a time of unprecedented global volatility.

The cooperative has "stood its ground" in the face of strong competition and had 85% of the country's milk production, while the number of shareholder suppliers continues to increase, Mr Wilson says.

Milk volumes are expected to be down 5% this year, and could fall further, which will mean inventory levels below last season.

Shareholders can expect to see a significant step-up this year in value-add products as the investment the company has made in recent years starts to pay off, Mr Wilson says.

The company has spent $2.3 billion on capital expenditure in the past three years, but has eased back on capex this year because of farmer concerns over the cooperative's high indebtedness. Its debt to equity ratio is expected to return to a range of 40-45 % this financial year.

Shareholders will vote at the meeting on a proposal to slim down the Fonterra board, but Mr Wilson says more time should be given to reviewing governance with an information booklet due out in January. "We have to take the time to get it right."

Farmer consultation is due to start in February with a special meeting to vote on the issue scheduled for May/June.

(BusinessDesk)