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April Payout Forecast

April Payout Forecast

Fonterra has announced a 40 cent increase in its payout forecast for the 2007/08 season. The increase, which is mainly in the milk price component of payout, brings the forecast to $7.30 per kilogram of milksolids.

Chairman Henry van der Heyden said the increase was the result of commodity prices holding up, largely because production out of New Zealand had dropped due to the drought.

The drought has changed the market since the December forecast of $6.90.

“The drought has cost Fonterra farmers 80 million kilograms of milksolids in lost production over the last three months.

“As production has dropped in New Zealand, supply gaps have opened up and prices have risen.
It’s ironic that the dry conditions which are hitting many farmers so hard have driven up prices.

“There’s no doubt that the increase will be welcome. But many farmers will just be clawing back the dollars they have lost from reduced milk production and increased costs for feed, fuel, and fertiliser.”

Mr van der Heyden said it is likely there is still some upside in this year’s payout.

“But the instability in the global financial markets may mean the Fonterra Board will consider retaining some of this season’s payout. That decision will be taken at the end of the financial year,” he said.

Fonterra Chief Executive, Andrew Ferrier, said the revised forecast was a good result, particularly as the smoothing effect of Fonterra’s long-term contract book meant that it had not been able to take full advantage of the high spot prices.

Mr Ferrier said the sharp drop in milk production since January had forced Fonterra to reallocate product although customer commitments have been met.

“In December, supply and demand were expected to be largely in balance and we were expecting prices to soften in the New Year, especially with Europe and the US forecast to increase supply.

“With the US in the market, SMP prices came off, as we expected, but as our drought has worsened and production has fallen off sharply supply has tightened and prices have stabilised.”

Mr Ferrier said WMP, cheese and butter had all risen in price with those gains helping to offset a five cent rise in the dollar since Christmas. The December forecast was based on a spot rate of 76 cents, while the current forecast spot rate is now 81 cents. He said the new forecast also factored in higher production costs relating to the drought, including the cost of transporting milk between regions and the loss of efficiencies in plants running below seasonal capacity.

The $7.30 forecast includes a small increase in the value component. It is up two cents to 22 cents, largely a reflection of the extra two months in this financial year.

“We are pleased with the strong performances of Fonterra’s overseas businesses, both in Brands and the high-end specialty ingredients. But this has been largely offset by our mainstream Ingredients business where margins are being squeezed by the higher commodity prices.

“It is possible that there will be some recovery in our Ingredients margins, so there is potential further upside in our value component,” Mr Ferrier said.

With the change in balance date from May 31 to July 31, Fonterra’s final payout for the 2007/08 season will be based on performance to the end of July. It will be paid on milksolids supplied to the end of the season of May 31 2008.

Fonterra will be announcing its 2008/09 season payout forecast in May.


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