Synlait's 2016/17 milk price forecast ahead of rival Fonterra

Synlait Milk [NZX: SML], the South Island-based milk processor, expects to pay its farmer suppliers 5.9 percent more for the upcoming season than larger rival Fonterra Cooperative Group [NZX: FSF].

Rakaia-based Synlait plans to pay its farmer suppliers $4.50 per kilogram of milk solids for the 2016/17 season, compared with Fonterra's $4.25/kgMS forecast. Synlait lowered its forecast milk price for the 2015/16 season to $3.90/kgMS, in line with Fonterra's expected payout but down from the company's $4.20/kgMS estimate in February. Open Country Dairy, the country's second-largest processor, has forecast $4.25-$4.45/kgMS for the 2016/17 season, up from an expected $3.85-$4.15/kgMS for the 2015/16 season.

Dairy products are New Zealand's largest commodity export and a global oversupply and weak demand has suppressed prices, pushed up dairy farm debt and caused much angst about the future outlook for the industry. New Zealand's milk production is declining as farmers reduce their output in response to weak prices, however, that hasn't yet pushed up prices to a high enough level to enable farmers to make money, with industry body DairyNZ estimating the average farmer needs $5.25/kgMS to break even.

"Unfortunately, increasing milk production in Europe, soft demand from China and trade sanctions in place with Russia continue to be more important than reduced milk production in New Zealand," said Synlait chairman Graeme Milne. "We expect our milk suppliers will continue to reduce milk production next season, however, we've planned for this by increasing the number of farmer suppliers and are confident we have sufficient milk supply to keep meeting strong demand from our customers."

Synlait said it will pay a higher advance rate for milk supply in the upcoming season to aid farmer cash flows through the winter.

The company expects to pay around $6 million of premiums to its suppliers in the current season, equating to about an extra 10 cents/kgMS, as it benefits from additional value coming from its sales of higher margin products.

Synlait is the exclusive manufacturer of A2 Platinum infant formula, sourced from herds that only produce A2 type beta-casein protein. It also has a partnership with US-based Munchkin Inc to exclusively produce Grass Fed infant formula.

Shares in Synlait, which is 39 percent owned by China's Bright Food, advanced 0.3 percent to $3.06 and have slid 3.5 percent this year.

The company expects to announce its final milk price for the 2015/16 season in late September, along with any revision to its 2016/17 forecast.

(BusinessDesk)