Synlait prices follow Fonterra's lead

Synlait Milk [NZX: SML], the South Island-based milk company, lowered its forecast payout to dairy farmers for the current season as prices remain weak amid oversupply and soft demand.

The company announced a higher price for the upcoming season on expectation prices will recover. The Rakaia-based company lowered its forecast payout for the current 2014/15 season to a range of $4.40-$4.60 per kilogram of milk solids, from a previous range of $4.50-$4.70/kgMS. It forecast a $5.50/kgMS payout to farmers for the upcoming 2015/16 season.

Synlait is following the lead of larger rival Fonterra, the world's largest dairy exporter, which lowered its payout for the current season by 10 cents/kgMS late last month to $4.40/kgMS and announced a $5.25/kgMS payout for the upcoming season.

Dairy companies have pulled back their expectations for milk prices as they face an oversupply in global markets following Russia's ban on dairy imports, the removal of dairy quotas n Europe and low demand in China. That's putting pressure on farmers, with the Reserve Bank estimating a quarter of them are operating in negative cash flow.

"We're aware of how financially tough this current season is for our suppliers," managing director John Penno says. "We are confident commodity prices will recover over time and our 2015/2016 forecast milk price assumes we will see the beginning of this recovery from the current low prices.

"The global oversupply is being met by soft demand across the board," he says. "This creates a lot of uncertainty in an already volatile market, so it will remain a fragile environment for the future."

Synlait expects to announce the final milk price for the 2014/15 season late September, along with an update to the 2015/16 forecast milk price and advance rates.

Shares in Synlait last traded at $2.73 and have shed 15% so far this year.

(BusinessDesk)