Fonterra Raises Milk Payout Forecast as 2015 Earnings Jump

Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, raised its forecast milk payout to New Zealand farmers more than economists expected and said full-year earnings increased.

The Auckland-based company will pay its 10,500 farmer suppliers NZ$4.60 ($2.88) a kilogram of milk solids in the current season ending May 31, up from a previous estimate of NZ$3.85, it said in a statement Thursday. New Zealand milk production will fall at least five percent from last season, Fonterra said.

Dairy prices have started to recover from a 12-year low after Fonterra reduced the amount it sells at auction on waning milk production. The increased payout is still close to half the record NZ$8.40 paid in 2013-14, reducing farm incomes, slowing economic growth and helping convince the central bank to cut interest rates.

“It is a mild but positive surprise that Fonterra has revised up its outlook as far as it has,” Nick Tuffley, chief economist at ASB Bank in Auckland, said in a note, adding the recovery in dairy prices may see the Reserve Bank pause its monetary loosening in October. “The production fall is, however, going to drag on economic growth.”

Currency Gains

The New Zealand dollar rose after the statement, buying 62.70 U.S. cents at 10 a.m. in Wellington from 62.47 beforehand.

Reserve Bank Governor Graeme Wheeler has cut the official cash rate three times this year as growth slows and inflation sits well below the midpoint of his target range. Nine of 14 economists in a Bloomberg poll predict the cash rate will be reduced to 2.5 percent on Oct. 29.

Fonterra confirmed a payout for last season of NZ$4.40 per kilogram of milk solids and a dividend of 25 cents per share. The combined distribution was the lowest since 2007.

Revenue Decline

Revenue fell 15 percent to NZ$18.8 billion in the year ended July 31 as global prices slumped, the company said. Still, normalized earnings before interest and tax surged 94 percent to NZ$974 million amid a recovery in margins, particularly in the ingredients business.

Shares in the Fonterra Shareholders’ Fund, which track the cooperative’s earnings and dividends, rose 1.9 percent to NZ$5.34 at 10:01 a.m.l in Wellington.

Chairman John Wilson said “extremely challenging” trading conditions globally had affected all parts of the cooperative’s business. Fonterra is in the middle of a review that has resulted in 750 job losses to date.

“Current global prices are unsustainable,” Wilson said in a statement. “While there are signs that supply growth globally is easing, a lift in demand, which is needed for prices to continue to rise, is still to come.”

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