Lower Australian opening farmgate milk price from Fonterra

Fonterra [NZX: FSF] is offering a lower opening price to its Australian farmer suppliers in the upcoming season and says it expects prices to recover over the year ahead.

The dairy cooperative has announced an opening price of $A4.75 per kilogram of milk solids for the 2016/17 season, rising to $5/kgMS by the end of the season. That compares with an $A5/kgMS payout for the 2015/16 season.

Fonterra's forecast is ahead of Australia's dominant milk processor Murray Goulburn which this week announced an opening forecast of a net $A4.31/kgMS for the 2016/17 season, which it expects to rise to $A4.80/kgMS by the end of the season.

Fonterra is obliged to at least match Murray Goulburn's price under its Bonlac supply agreement.

Dairy companies have been cutting payments to their farmer suppliers as they grapple with weak global dairy prices which have remained lower for longer than expected as supply continues to exceed demand.

Fonterra says its forecast is based on the Australian dollar holding at around 74USc and reflects the revenue it expects to earn on products it manufactures.

"Our farmgate milk price in Australia is also impacted by global dairy markets given our mix of domestic and export sales," Fonterra chief operating officer of velocity and innovation Judith Swales says.

"While we are still seeing an imbalance between global milk supply and demand there are signs in key milk producing areas of a slowdown in production and increased imports into key markets such as China, Asia and Latin America. This supports our view of a recovery in global prices as we move through the season."

Individual suppliers' milk prices will vary across regions, depending on the individual farm's milk profile, regional production factors, milk quality and farm management systems, the company says.

Fonterra's Australian business has underperformed for several years in an environment of fierce competition for milk supply and over-capacity in dairy production, although Ms Swales said in November the unit should become profitable in the next year.

The cooperative is focused on building on its ingredients strengths by making Australia Fonterra's global hub for cheese, whey, and nutritionals, complementing its consumer and foodservice businesses.

"We are focusing on the future, and are continuing to build a strong Australian business that is here for the long term," Ms Swales says.

Units of the Fonterra Shareholders' Fund last traded at $5.41 and have slid 9.7% this year.

(BusinessDesk)