Fonterra cuts milk price forecast by 25c

The forecast would be lower were it not for the weaker exchange rate.
Fonterra chairman John Monaghan says the demand/supply equation is changing.

Fonterra has lowered its forecast farmgate milk price to $6.75/kg of milk solids for the 2018/19 season due to stronger milk supply coming from key overseas markets.

The new forecast compares with the co-operative’s previous guidance in May of $7/kg and follows the recent 5c cut in the payout for last season to $6.70.

“Over the past quarter, we have seen increased milk supply out of markets including Europe, the US and Argentina,” chairman John Monaghan says.

“These regions have a big influence on the supply and demand balance and therefore global prices. For example, the 1% increase in US milk production represents just under 100 million litres of extra milk. 

“At the same time, demand for whole milk powder and dairy fats is showing signs of slowing in some parts of Asia, Africa and the Middle East.”

New interim chief financial officer Miles Hurrell says the weakening $NZ/$US exchange rate had only partially offset the decline in global dairy prices.

“A drop in the new season milk price forecast will be frustrating to our farmers but it’s important we give them the facts so they can make informed decisions in their farming businesses,” Mr Hurrell says.

Under the DIRA legislation Fonterra has to update its milk price every three months.

Earlier this month Fonterra announced its earnings per share would be at or below the low end of its previous forecast, despite the 5c/kg cut to its milk price for last season.

Fonterra also said it was unlikely to pay a final dividend as the board sought to protect its balance sheet.

That means investors will receive only the 10c a share interim dividend paid in April, representing a drop of 75% on the 40c of dividends paid the previous year.

Fonterra’s half-year result in March was affected by a payment of $183 million to French dairy company Danone and the poor financial performance of joint venture partner Beingmate.

In October 2017 Fonterra booked $76m of losses relating to Beingmate, including a $35m writedown in the fair value of the 18.8% shareholding.

Six months later, in March it reduced the carrying value by $433m to $244m. The adjustment included a $405m impairment and a $28m share of Beingmate losses.