Fonterra Cooperative Group today maintained a forecast farmgate milk price of $4.60 per kgMS. Along with the November announced estimated earnings per share range of 45-55 cents, this amounts to a total available for payout of $5.05-$5.15 kgMS and would currently equate to a total forecast cash payout of $4.95-$5.00.
The world’s largest dairy exporter is banking on global dairy prices improving in the first half of next year.
It has also decided against extending the cooperative farm support loan of 50 cents per share-backed kgMS beyond this month, the Auckland-based cooperative said in a statement.
Fonterra is required to consider its forecast farmgate milk price every quarter as a condition of the Dairy Industry Restructuring Act (DIRA).
Chairman John Wilson said the board and management had looked out over the next nine months and based the stable forecast on the view that current, unsustainably low prices, will continue to impact production levels globally.
“We support the consensus view in the market that an improvement will take place, but the market remains volatile. While there are signs of a recovery, particularly in China, we still need the imbalance between supply and demand to correct,” he said.
“That imbalance is starting to reduce with year to date production in the US up by only one per cent and slowing, and New Zealand volumes expected to be down by at least six per cent over the current season. In the EU, however, farmers are continuing to push production, currently up one per cent.”
Current global dairy prices are still way below what iss required to sustain the payout and DairyNZ has estimated the average farmer needs a payout of $5.40/kgMS to break even.
Fonterra’s board also reviewed the Fonterra Cooperative support loan. The loan was made available on production from June 1 to December 31. The loan of 50 cent per kgMS is interest-free until May 31 2017, with repayments triggered when the farmgate milk price exceeds $6 per kgMS.
Wilson said the board’s scheduled review had weighed up the improved farmgate milk price and higher earnings per share forecast since the loan was launched, when the milk price was at $3.85, and the need for financial discipline from the cooperative. The board has decided not to continue the cooperative support loan for milk collected after December 31, but will monitor conditions and assess the need to continue the support if market conditions changed later in the season.
“We will provide some $390 million in support to around 75 per cent of our farmers through the most productive half of the season, including the peak. Farms typically produce 60 per cent of their milk in the first half, with production beginning to taper off from December, so we have provided support when it is needed the most,” said Wilson.
Ratings agency Fitch said in a report that the cooperative support loan and higher than normal advance payments were the two key reasons behind its two notch ratings downgrade of the cooperative in October.
Ratings agency Fitch said in a report that the cooperative support loan and higher than normal advance payments were the two key reasons behind its two notch ratings downgrade of the cooperative to AA- in October. When first announcing the downgrade, Fitch blamed Fonterra’s weakened business profile and the volatility of global diary prices revealing its vulnerability to adverse conditions. According to the latest report, Fitch says there were two specific steps Fonterra took which it believed to be financially costly: choosing not to reduce its advance-rate milk payments to farmer shareholders when milk prices declined, and providing interest-free loans to farmer shareholders to ease cash flow strain associated with weak dairy prices.
The Fonterra Shareholders’ Fund, which gives holders rights to Fonterra’s dividends, last traded at $5.75 apiece, and has shed 4.3 per cent so far this year.
