Fonterra cuts forecast milk payout on falling dairy prices

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)