Fonterra Forecasts Milk Price Recovery as Farmer Payout Cut

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Fonterra Cooperative Group Ltd, the world’s biggest dairy exporter, forecast a recovery in milk prices even as it cut its estimated payout to New Zealand farmers for the current season.

Fonterra Thursday lowered its 2014-15 payout by 10 cents to NZ$4.40 ($3.20) a kilogram of milksolids, and forecast a farmgate milk price of NZ$5.25 a kilogram for the season ending May 2016. ASB Bank economists had predicted an opening Fonterra forecast for 2015-16 of around NZ$5.

“We can expect prices to recover going forward, and to see a rebalancing of supply and demand over the season,” Chairman John Wilson said in a statement. “However it is more difficult this early in the season to determine exactly when this recovery will lead to a sustained price improvement.”

Dairy prices have slumped to a five-year low amid a global glut, hurting New Zealand farmer incomes and threatening to curb the nation’s economic growth. Fonterra’s farmer payment has dropped from a record NZ$8.40 a kilogram last season.

“World markets are over-supplied with dairy commodities after farmers globally increased production in response to the very good prices paid 12-18 months ago,” Wilson said. “This supply imbalance has heightened due to continuing good growing conditions in most dairy producing regions.”

The New Zealand dollar rose as high as 72.71 U.S. cents from 72.44 cents on Fonterra’s statement before easing to 72.48 cents at 12:32 p.m. in Wellington.

Fundamentals ‘Strong’

Fonterra maintained its estimated dividend for the financial year ending July 31 of 20-30 cents a share. Shares in the Fonterra Shareholders’ Fund, a trust that tracks the cooperative’s dividend payout and earnings, fell 2 cents to NZ$4.88.

Chief Executive Theo Spierings said the long-term fundamentals of global dairy demand are strong.

“Our forecast for the new season takes into account a range of factors including global milk production forecasts, the economic outlook of major dairy importers, current inventory levels and geopolitical events,” he said in the statement.

Signs of increasing demand in markets like China coupled with reduced global supply should see prices gradually recover, Chief Financial Officer Lukas Paravicini said in an interview.

RBNZ Rates

Still, the advance rate Fonterra pays to farmers for the coming season will begin at NZ$3.66 per kilogram of milksolids, 70 percent of the forecast farmgate milk price.

Farmer incomes will shrink by more than NZ$6 billion as a result of the drop in milk prices, according to economists at ANZ Bank New Zealand Ltd. That should prompt the Reserve Bank of New Zealand to cut interest rates next month, they said.

“The dairy sector is at the vanguard of the shifting risk profile facing the economy and given low inflation, we believe the RBNZ should be responding to these growing risks by delivering insurance-type rate cuts in June and July,” the economists said in an e-mailed note.

The central bank, whose cash rate is currently at 3.5 percent, will decide on borrowing costs on June 11. Most economists expect the RBNZ to keep rates on hold next month.

“From a farmer’s point of view, obviously a lower interest rate would help significantly in the environment of a low milk price, especially for those farmers who have significant debt,” Paravicini said. “We would expect with rate cuts the dollar to come down, which in our case as an exporting industry would be good.”

(Updates with CFO comments in 10th, 15th paragraphs.)
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