Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, slashed its forecast payment to New Zealand farmers as increasing global milk production and a build-up of inventory in China damps prices.
Farmers will receive NZ$6 ($5.10) a kilogram of milksolids for the season ending May 2015, the Auckland-based company said in a statement. That’s down from an initial forecast of NZ$7 in May and the NZ$8.40 paid in the 2013-14 season.
“We have seen strong production globally, a build-up in inventory in China and falling demand in some emerging markets,” Chairman John Wilson said in the statement. “In addition, the New Zealand dollar has remained strong.”
Should NZ$6 be the final payment, it would result in a NZ$4.3 billion slump in collective farm income and slice 1.9 percent off New Zealand’s gross domestic product, said Dominick Stephens, New Zealand chief economist at Westpac Banking Corp. Fonterra reviews the payment as the season progresses depending on price and currency trends.
The New Zealand dollar fell after the revised forecast. It bought 85.17 U.S. cents at 4:55 p.m. in Wellington from 85.45 cents immediately before the statement,
Reserve Bank Governor Graeme Wheeler said July 24 the currency’s strength was “unjustified” and it had yet to adjust to weakening commodity prices.
Whole milk powder prices fell to the lowest since September 2012 in a July 15 auction and they have slumped 39 percent since a peak in early February, according to the GlobalDairyTrade auction site.
“Westpac is assuming a small further reduction in auction prices over the next month or two,” Stephens said in a statement. “We do expect a very substantial recovery in auction prices, but not until the last quarter of this year.”
A fall in milk costs will boost Fonterra’s earnings from value-added and branded products such as yogurt, enabling the company to raise its dividend forecast to 20-25 cents a share from 10 cents a year ago.
Shares in the Fonterra Shareholders’ Fund, a publicly traded trust that tracks the cooperative’s dividend payout and earnings, rose 7 cents, or 1.2 percent, to NZ$6.07 at the 5 p.m. close in Wellington.
“During the first half of the current financial year we expect reduced cost of goods arising from lower dairy commodity prices to have a positive impact on returns,” Chief Executive Officer Theo Spierings said in the statement. “Our forecasting anticipates some recovery in global dairy prices but it is too early to predict how strong this recovery will be or when it will kick in.”