Fonterra revises payout to $4.70

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Fonterra’s farmers have received an unwelcome 60c/kg milksolids (MS) reduction in milk payout forecast, now down to $4.70/kg MS with more cheese-paring to come.

The important advance rate to farmers will be reduced by 15c to $3.85/kg MS for January’s milk production, payable in February.

Nor did the latest payout announcement contain any compensatory news about dividend expectation, which is usually expected to rise as milk prices fall.

Fonterra chairman John Wilson said the directors would look at dividend guidance when the interim result was announced in mid-March.

The revised forecast is the lowest Fonterra milk price in seven-and-a-half years, since the 2006-07 season, and comes after a record high $8.30/kg MS was paid last season.

The average dairy farm producing 150,000kg MS a season will suffer an income fall of more than $500,000 from last season to this season, smoothed a little by Fonterra’s payout schedule.

The unprecedented turnaround has been caused by increased milk supply from New Zealand, Europe and the United States at a time when the Chinese have refrained from buying dairy commodities and the Russians have retaliatory trade bans.

Wilson admitted that considerable volatility in world markets contained factors that would delay a sustained return to higher global prices.

That was in contrast to the $5.30 revision in late September when Fonterra expected a lift in world markets before March, in time to underpin the seasonal forecast.

But his only reference to September’s faulty prediction was to point out the obvious; that GlobalDairyTrade whole milk powder prices (Fonterra’s largest output) had fallen 17% since.

“Falling oil prices, geopolitical uncertainty in Russia and Ukraine, and subdued demand from China as it continues to work through inventory are all contributing to ongoing volatility and weak demand,” Wilson said.

Chief executive Theo Spierings said the co-operative had a “targeted programme to generate more cash to support farmers.

“We will be further strengthening our tight controls on operating expenditure, and will be driving harder on working capital, and deferring capex – provided this does not slow progress on our V3 business strategy.

“This is a clear signal to farmers that we are all in this together. We are tightening our belts, just as they are.”

Shareholders’ Council chairman Ian Brown said farmers would be understanding of the payout reduction.

“(They) understand the reality of the situation is that this year will not be a great one in terms of milk price.

“Farmers will be focused on getting through this year and ensuring they place their businesses in the best possible shape for next season.”

Brown did turn up the heat on the delayed dividend expectations by recalling the emphasis on strategy over the past couple of years.

He said it was important that farmers received “full benefit for their investment in the integrated supply chain that their co-op provides”.

The New Zealand dollar fell to US0.7670 from 0.7710 immediately before the 8:32am announcement.