Fonterra cuts forecast milk payout on falling dairy prices

Chairman John Wilson says the cuts reflect volatility in global milk prices.
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Fonterra Cooperative Group cut its forecast farmgate milk price citing weaker global dairy prices and increased production and skim milk stockpiles in Europe.

The dairy company cut the payout forecast to $6.40 per kilogram of milk solids, within the range expected by economists, from the $6.75/kgMS forecast in September.

The GlobalDairyTrade price index rose 0.4 percent in this week's auction, snapping four consecutive declines, although the gain came on lower volumes sold. Fonterra paid its farmer suppliers $6.15/kgMS for the 2016/17 season and $3.90/kgMS for the 2015/16 season.

Chairman John Wilson said the cut reflects ongoing volatility in global dairy prices and cited a 10 percent drop in the price of whole milk powder since Aug. 1.

"What is driving this forecast is that despite demand for dairy remaining strong, particularly in China, other parts of Asia and Latin America, we are seeing strong production out of Europe and continued high levels of EU intervention stockpiles of skim milk powder," he said in a statement to the ASX. The impact on Fonterra was being partly offset by a weaker New Zealand dollar, he said.

Fonterra also cut its forecast New Zealand milk collection for this season, by 1 percent to 1,525 million kilograms of milk solids from the 1,540 million kilograms it projected in October, which itself was a downgrade.The cut reflected "ongoing challenging weather conditions."

Revenue in the first quarter rose 4 percent to $4 billion although sales volumes dropped 20 percent to 3.9 billion liquid milk equivalent and said its gross margin fell to 16.7 percent.

Chief executive Theo Spierings said Fonterra started the year with record low inventory after the second straight year of low spring milk collections from New Zealand "due to wet weather."

"This has challenged our ingredients business where we had lower volumes to sell," he said. "As a result, sales were down 19 percent to 3.6 billion LMEs." The gross margin from ingredients fell to 8.1 percent from 12.1 percent.

Consumer and food service recorded "strong sales volumes in our key markets across both Greater China and Asia with, overall, just a 3 percent decline to 1.3 million LMEs in total volume compared to the record levels at the same time last year," Spierings said.

The gross margin in consumer and food service fell to 24 percent in the first quarter from 31 percent a year earlier. Spierings said Fonterra is confident of meeting its full-year forecasts following revisions after the recent Danone announcement.

Last week Fonterra cut its forecast for 2018 earnings per share to a range of 35 to 45 cents, from 45 to 55 cents after an arbitration tribunal in Singapore ruled it must pay $183 million to Danone in the wake of 2013's whey protein recall.

(BusinessDesk)


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When are Fonterra execs going to fully admit that they made a disastrous investment decision with BeingMate and are now down the tubes 60%+ on the shares? When are Fonterra execs going to cut their bloated salaries to help out farmers who have to wear the costs of their screw-up with the botulism/Danone fiasco?

2018 is going to be a VERY interesting year for this company!

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Goodness me, that sounds very much like you're expecting accountability. Surely not ...

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Fonterra execs will admit to nothin', that may raise questions as to the poor decisions that have been made and how well they're paid for making them. After all, they're dealing with the principal shareholders who've become a bit like their mainstay income-earners: Very bovine in accepting as to what's being told to them, nod their heads in abstract acceptance and then wander off en masse to chew cud.

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You, and everyone else already know the answers to your questions... never.

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Mr Moose,
You know damn well, or at least you should given all the knowledge you espouse, that the milk price has nothing to do with Beingmate. That is part of the dividend calculation.
The "Danone fiasco" outcome is a separate issue as well and that outcome appears to be a dodgy legal interpretation based on one judges opinion. My information is that, contractually, any claim was limited to $30mill. Any other judge may have come back with a different ruling. I agree however that there should be some accountability somewhere.
You are most welcome to express an opinion but please make it an informed opinion rather than an emotional one.

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Pray, do tell me where I alluded to the milk price and BeingMate in the same breath in my comment? Yeah, thought so. Read my comment again, then think on it before commenting. You know as well as I do there is no link there to begin with!

BeingMate always was, and continues to be, a terrible decision which Fonterra executives continue to refuse to accept as such. Reminds me of the huge markdown on their San Lu investment which Fonterra had to finally admit was a terrible decision and for which they did not do proper due diligence on (see article: http://www.stuff.co.nz/business/632523/Fonterra-fronts-up-over-China-mil...)

As for the Danone fiasco, you agree there should be accountability. Ummm, so where is it? I certainly don't see it from Fonterra execs, now saddling farmers with the cost of the ruling!

You too are most welcome to express an opinion, but please don't skew my words in a very weird way and put my intelligence to question!

Have a great day! :)

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You make a very good point as to the basis of why there is a cut. However the management still has a lot to answer for. Why when in the lead up to the merger, Kiwi/Anchor did they say they will be the Nestle of the South pacific, when all they were, until other companies like A2 and Synlait showed them the way, was a powder milk processor.
However we must also remember that Fonterra started the Global Dairy Auctions to gain a better price, this has yet to be challenged, as to its success
The products they are developing are not niche high end products they are going for volume much like they did with milk powder. There is still a lot to lean at Fonterra, the first being you do not need a bloated bureaucracy to run a successful company just dedicated people rewarded for results.

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You've got to remember that in the early days, under the terms of DIRA, Fonterra had to take all the milk that was thrown at it. So Fonterra struggled to stay ahead of supply. Now that surge of new milk is subsiding they can concentrate more on Value Add.
You may be correct about staffing but bear in mind they still have a hell of a lot of milk to process each day. The smaller companies have nowhere near that amount. Further more they can all call on overseas capital to fund their growth.

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Why some people keep trying to justify the dopey DIRA legislation is quite beyond me.
Now it seems that DIRA was a hindrance!!!!
Excuse me RWB but DIRA was passed for only one reason. That reason was to enable Fonterra to add unearned increment to their products and so steal more consumer dollars than they otherwise would be able to. NO other reason.
For proof, have a look at the price of say, Fonterra's butter in NZ and then see the same brands butter price in, say, Sydney.

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