Fonterra's lower 2015 milk forecast to be drag on NZ GDP, have less impact on earnings

UPDATED: Fonterra Cooperative Group's [NZX:FCG] forecast 17 percent drop in its milk payout for 2014/2015 will likely weigh on the New Zealand economy next year but will have less impact on the dairy exporter's own earnings, which have been driven by the gap between milk powders and other products.

The world's biggest dairy exporter forecast a farmgate milk payout for the coming season of $7 per kilogram of milk solids, down from a revised $8.40 kg/MS for the current season. The total cash payout for 2015, including dividends, will be announced in July.

The company today affirmed the guidance it gave in December for 2014 earnings before interest and tax of $500 million to $600 million, down from normalised Ebit of $1 billion in 2013. It didn't give an estimate for 2015. Its dividend forecast was kept unchanged at 10 cents a share, having been slashed by two thirds in December. At the same time, Fonterra expects milk supply for next season of 1.6 million kg/MS, up 2 percent on the current season forecast of 1.58 million kg/MS

The reduced payouts would all up take about $2.6 billion out of the domestic economy in the next 18 months, amounting to about 1.1 percent of gross domestic product, according to Con Williams, rural economist at ANZ Bank. But farmers' cash flow "is likely to step up a bit," he said. "One of the stories that has been missed is the productivity story."

"The coming year’s milk price forecast would be the fourth highest on record if achieved and the dividend still needs to be added," Williams said. "From a profitability and cash flow point of view farmers will still be in a very good position over the coming 12 months. In fact cash flow is likely to be very similar to the past 12 months."

The kiwi dollar climbed after the Fonterra announcement and was recently at 85.62 US cents, from 85.38 cents immediately before. The forecast 2015 payout is in the middle of the $6.50 and $7.50 per kg/MS expected by economists, who saw a cut as inevitable give the decline in dairy prices, according to Bank of New Zealand

Dairy product prices have dropped 23 percent since Fonterra's board forecast a record milk payout in February. The board had used its discretion that month to keep the forecast payout 70 cents lower than what it would be using calculations from the regulated milk price manual, citing a production mismatch where the price of whole and skim milk powder surged ahead of higher margin products such as cheese and butter.

Fonterra has flagged $400 million to $500 million of additional capital spending over the next three or four years building new capacity to reduce product mix constraints. That will include two new milk powder plants, one each in the North and South islands, the company said today.

Dairy product prices fell to a new 15-month low in the latest GlobalDairyTrade auction last week, after spiking up in early 2013,  and Fonterra chief executive Theo Spierings expects  more volatility in global markets.

“Dairy commodity prices have come off the peak reached in early February this year, as global supply and demand have rebalanced," he said. "The shift in supply and demand over the past few months showed that volatility continued to exert a strong influence over the global outlook for dairy."

"There is currently more milk available for the international market to absorb,"  Spierings said. "We expect demand from China to remain strong. In Russia, there will be pressure on the balance between imports and local production. These factors are expected to continue influencing the supply-demand balance.”

Units in the Fonterra Shareholders' Fund, which gives investors exposure to the group's dividends, were unchanged at $6, and have gained 3.5 percent this year.

(BusinessDesk)

EARLIER: Fonterra cuts 2014 milk payout forecast to $8.40, flags $7 for 2015

Fonterra Cooperative Group [NZX:FCG], the world’s biggest dairy exporter, cut its forecast 2014 milk payout by 2.9 percent and said it expects the payout for the 2015 season to tumble to $7 per kilogram of milk solids, reflecting a decline in world dairy prices and increased global supply.

Auckland-based Fonterra cut its forecast for the current season ton $8.40 kg/MS from the previous estimate of $8.65 kg/MS, which would have been a record. Its dividend forecast was kept unchanged at 10 cents a share, having been slashed by two thirds in December, and the dairy producer affirmed its guidance for earnings.

“Dairy commodity prices have come off the peak reached in early February this year, as global supply and demand have rebalanced," chief executive Theo Spierings said in a statement. "The shift in supply and demand over the past few months showed that volatility continued to exert a strong influence over the global outlook for dairy."

Dairy product prices have dropped 23 percent since Fonterra's board forecast a record milk payout in February. The board had used its discretion that month to keep the forecast payout 70 cents lower than what it would be using calculations from the regulated milk price manual, citing a production mismatch where the price of whole and skim milk powder surged ahead of higher margin products such as cheese and butter.

“After seeing recent improved stream returns on powders and other products, and considering the level of risk likely in the remaining three months of the financial year, the board has decided to reduce that 70 cent gap by 15 cents, to 55 cents," chairman John Wilson said today.

The kiwi dollar edged up to 85.51 US cents after the announcement, from 85.38 cents immediately before. The forecast 2015 payout is in the middle of the  $6.50 and $7.50 per kg/MS expected by economists, according to Bank of New Zealand.

Dairy product prices fell to a new 15-month low in the latest GlobalDairyTrade auction last week.

Fonterra said it expects milk supply for next season of 1.6 million kg/MS, up 2 percent on the current season forecast of 1.58 million kg/MS. Supply was also likely to increase in other markets.

"There is currently more milk available for the international market to absorb,"  Spierings said. "We expect demand from China to remain strong. In Russia, there will be pressure on the balance between imports and local production. These factors are expected to continue influencing the supply-demand balance.”

Units in the Fonterra Shareholders' Fund, which gives investors exposure to the group's dividends, rose 1.4 percent to $6 yesterday, and have gained 3.5 percent this year.

(BusinessDesk)