Fonterra Maintains Milk Price Forecast

August 2, 2016 02:11 PM

Fonterra Cooperative Group Ltd., the world’s biggest dairy exporter, maintained its forecast milk payout for the current season even as a strong New Zealand dollar hurts its global competitiveness.

Auckland-based Fonterra on Monday kept its estimated farmgate milk price at NZ$4.25 ($3.06) a kilogram of milksolids for the season ending May 31, 2017 -- a small improvement on last year’s NZ$3.90 a kilogram, which was a nine-year low. The company predicted earnings per share of 50-60 NZ cents, taking the total payout available to farmers to between NZ$4.75 and NZ$4.85 a kilogram.

The central bank estimates some 80 percent of New Zealand’s dairy farmers are operating at a loss as a global milk glut depresses dairy incomes for a third straight year. Governor Graeme Wheeler has already cut the benchmark interest rate to a record-low 2.25 percent and said another reduction is likely, even though a booming housing market is threatening financial stability.

“It is another financially challenging season for farmers,” Fonterra Chairman John Wilson said in a statement. “The recent weakening of the euro, combined with the continued strength of the New Zealand dollar, has meant a price advantage for European export dairy products.”

Strong Kiwi

The New Zealand dollar rose after the Fonterra statement before retreating to trade little changed at 72.06 U.S. cents at 10:17 a.m. in Wellington. The currency has jumped 10 percent the past three months.

“We expect global milk supply and demand to come into balance over the course of this season,” Wilson said. “Farmers globally are producing less milk in response to lower prices and we are forecasting a 3 percent reduction in our New Zealand milk collection for this season.”

Westpac Bank is forecasting a milk price of NZ$4.60 this season, albeit with downside risk, senior economist Anne Boniface said in an e-mailed note.

“Although we expect dairy prices to improve gradually from late 2016 into 2017, the strong New Zealand dollar is likely to weigh on farmgate returns, while at the margin whole milk powder prices have also been a little weaker than anticipated in the first couple of months of the 2016/17 season,” she said.

Fonterra announced it will now include the revenue from spot sales of commodity whole and skim milk powders and anhydrous milk fat in its farmgate milk price calculation. Spot sales are direct-to-customer sales in the global commodities market of products with the same specifications as those sold over the GlobalDairyTrade platform.

The change may add four to five cents to the milk price in the current season, Fonterra said.

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