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UPDATED: Growth in global milk pool 'unusual,' says Spierings, in cutting forecast

UPDATEDThe global market for dairy products have been in the unusual situation where most producers have been lifting supply, while demand weakened in China, Southeast Asia and the Middle East, says Fonterra Cooperative Group [NZX: FCG] chief executive Theo Spierings.

The world's biggest dairy exporter today cut its Farmgate Milk Price forecast for the 2014/2015 year to $6 a kilogram of milk solids from a previous forecast of $7 kg/MS, reflecting a slide in global dairy prices, which touched their lowest levels since December 2012 in the latest GlobalDairyTrade auction. It flagged a dividend of 20 cents to 25 cents, up from last year's 10 cent payment.

"All milk pools around the world showed significant growth - we see milk coming from everywhere," Spierings said. "On the demand side, China is looking at pretty high inventories" although in-market sales "are still very, very strong in China." Demand in Southeast Asia and the Middle East had dropped off faster than expected as rising prices were passed onto consumers, he said.

Fonterra doesn't expect to face the same production pressures as it did last season, when it produced milk powder at full capacity to meet demand from China. In the coming season it is possible the company lifts production of other products, he said.

The dollar fell to 85.13 US cents from 85.45 cents ahead of Fonterra's announcement and the trade-weighted index fell to 79.47 from 79.77 as traders and economists mulled the likely impact on the New Zealand economy and interest rates.

"Fonterra farmers’ farm-gate income will be collectively around $3.8 billion down from last year’s stellar season, though with a small offset through the share dividend expected to be higher over the season," ASB Bank chief economist Nick Tuffley said in a note. "The Fonterra update quantifies the impact of the decline in dairy prices seen since the original forecast was made.  From an interest rate perspective the RBNZ has been taking into account the drop in GDT dairy prices and the stubbornness of the NZ dollar, with both factors being part of the decision to step to the sidelines."

Elevated dairy prices propelled New Zealand's terms of trade to a 40-year high in the first quarter of this year, providing a major impetus to the nation's growth, though economists say trade has probably peaked given the subsequent decline in prices of milk powder exports.

"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," chief executive Spierings said in a statement.  “As we continue to drive for growth in our consumer and foodservice businesses, 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."

He said the lift in the dividend estimate was "based on zero ingredients stream returns at this early stage in the season," meaning it could yet be revised higher.

Units in Fonterra Shareholders' Fund [NZX: FSF], which give investors access to the company's dividends, rose 1.2 percent to $6.07.

(BusinessDesk)

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EARLIERFonterra slashes 2015 payout forecast; dollar falls

Fonterra Cooperative Group [NZX: FCG] cut its forecast 2015 milk price payout by 14 percent, citing a decline in global dairy prices in the face of strong global production, a build-up of inventory in China and falling demand in emerging markets. The kiwi dollar dropped to the lowest in almost seven weeks.

The Farmgate Milk Price forecast for the 2014/2015 year was reduced to $6 a kilogram of milk solids from a previous forecast of $7 kg/MS. At the same time the company forecast a dividend of 20 cents to 25 cents a share, up from the 10 cents it plans to pay this year.

The announcement, which came after Fonterra's board meeting, was widely expected, given that prices of dairy products have tumbled this year and reached the lowest level since December 2012 in the latest GlobalDairyTrade auction. The cut to the forecast was more than some economists had expected and the kiwi dollar weakened to 85.14 US cents from 85.45 cents ahead of the statement. The trade-weighted index fell to 79.54 from 79.77.

"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," chief executive Theo Spierings said in a statement. "As we continue to drive for growth in our consumer and foodservice businesses, 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."

He said the lift in the dividend estimate was "based on zero ingredients stream returns at this early stage in the season."

Units in Fonterra Shareholders' Fund [NZX: FSF], which give investors access to the company's dividends, rose 1.7 percent to $6.10.

Elevated dairy prices propelled New Zealand's terms of trade to a 40-year high in the first quarter of this year, providing a major impetus to the nation's growth, though economists say trade has probably peaked given the subsequent decline in prices of milk powder exports.

Exports of milk powder, butter and cheese make up 31 percent of New Zealand's total overseas shipments, based on government figures for the 12 months ended May 31, and surged 36 percent in that year. Dairy exports are almost three times more valuable than meat, the next-biggest commodity New Zealand sells to the world.

(BusinessDesk)

Comments and questions
4

In the light of this downturn we can presumably see Fonterra abandon it's plan for an expensive new head office?
paleo

The brains trust has it being built on leasehold land.

Suspect a few spectacular rent hikes coming

With the massive advantage of not having to buy the land.

Not quite sure why this is an unusual situation. When prices are up you would assume every producer is going to try and make the most of it and increase production. Pretty usual I would have throught.