Fonterra increases payout as confidence in dairy market grows

Posted by Daniel Palmer on 9th November 2009

Fonterra, the world’s largest dairy exporter, today announced a further increase in the forecast payout to its farmer-shareholders for the current 2009/10 season as their confidence in higher dairy prices rises.

The Co-operative’s forecast of the total payount amount will increase 95 cents to $6.05 per kgMS. The new forecast compares with an opening forecast for 2009/10 of $4.55 per kgMS and a revised forecast of $5.10 per kgMS announced on 22 September 2009 and is a sign of the rapid, albeit fragile, improvement in dairy markets.

“The improvement in global dairy markets reinforces that dairying is a business that’s in good heart with sound long-term prospects, both for Fonterra shareholders and the broader New Zealand economy,” Fonterra Chairman, Sir Henry van der Heyden, said. “A big gain like this in the payout forecast, just shows how much volatility there is in the market.”

“It’s heading in the right direction and we’re making the most of the opportunities for our farmers. But, we also know there’s a risk of rapidly rising prices potentially bringing on more milk from other countries. We saw this happen in 2007 and we saw how quickly the market can fall as a result.”

Fonterra CEO, Andrew Ferrier, reported that improving market conditions for dairy commodities have been reflected in recent trading events on Fonterra’s globalDairyTrade (gDT) online platform, which in the last financial year accounted for about 10% of Fonterra’s sales.

Since the September forecast revision, there have been two monthly trading events, the most recent when whole milk powder (WMP) prices rose by an average 13.7 per cent. Over the past four months, average WMP prices on gDT have risen by a total of 88 per cent.

Mr Ferrier advised that there is a tight supply situation globally for many dairy commodities and this is reflected in current pricing. Fonterra has also recently confirmed some key contracts with major customers, further improving confidence about the season’s outlook.

“Although prices for all dairy products are now increasing, the recovery has been strongest across the range of commodity milk powder streams that are used as the basis for the Milk Price component of payout to Fonterra farmers,” he said. “This is good for our farmers, as it drives a higher milk price, but it is putting profits under pressure.”

“Prices for non-powder products such as cheese and casein have not risen at the same rate as powder prices.”

Fonterra’s other businesses, principally the consumer brands division and global dairy ingredients and foodservices division, are meeting expectations, Mr Ferrier added.

“The other business units that contribute to profit continue to perform well and their expected earnings for 2009/10 remain unchanged from previous forecasts,” he said. “However the high NZ$/US$ exchange rate would impact negatively when the profits were converted back into New Zealand dollars.”