Growth in global milk pool 'unusual,' says Spierings, in cutting forecast
By Jonathan Underhill
July 29 (BusinessDesk) - The global market for dairy products have been in the unusual situation where most producers have been lifting supply, while demand weakened in China, Southeast Asia and the Middle East, says Fonterra Cooperative Group chief executive Theo Spierings.
The world's biggest dairy exporter today cut its Farmgate Milk Price forecast for the 2014/2015 year to $6 a kilogram of milk solids from a previous forecast of $7 kgMS, reflecting a slide in global dairy prices, which touched their lowest levels since December 2012 in the latest GlobalDairyTrade auction. It flagged a dividend of 20 cents to 25 cents, up from last year's 10 cent payment.
"All milk pools around the world showed significant growth - we see milk coming from everywhere," Spierings said. "On the demand side, China is looking at pretty high inventories" although in-market sales "are still very, very strong in China." Demand in Southeast Asia and the Middle East had dropped off faster than expected as rising prices were passed onto consumers, he said.
Fonterra doesn't expect to face the same production pressures as it did last season, when it produced milk powder at full capacity to meet demand from China. In the coming season it is possible the company lifts production of other products, he said.
The dollar fell to 85.13 US cents from 85.45 cents ahead of Fonterra's announcement and the trade-weighted index fell to 79.47 from 79.77 as traders and economists mulled the likely impact on the New Zealand economy and interest rates.
"Fonterra farmers’ farm-gate income will be collectively around $3.8 billion down from last year’s stellar season, though with a small offset through the share dividend expected to be higher over the season," ASB Bank chief economist Nick Tuffley said in a note. "The Fonterra update quantifies the impact of the decline in dairy prices seen since the original forecast was made. From an interest rate perspective the RBNZ has been taking into account the drop in GDT dairy prices and the stubbornness of the NZ dollar, with both factors being part of the decision to step to the sidelines."
Elevated dairy prices propelled New Zealand's terms of trade to a 40-year high in the first quarter of this year, providing a major impetus to the nation's growth, though economists say trade has probably peaked given the subsequent decline in prices of milk powder exports.
"Our forecasting anticipates some recovery in global dairy prices but it is too early to predict how strong this recovery will be or when it will kick in," chief executive Spierings said in a statement. “As we continue to drive for growth in our consumer and foodservice businesses, during the first half of the current financial year we expect reduced cost of goods arising from lower dairy commodity prices to have a positive impact on returns."
He said the lift in the dividend estimate was "based on zero ingredients stream returns at this early stage in the season," meaning it could yet be revised higher.
Units in Fonterra Shareholders' Fund, which give investors access to the company's dividends, rose 1.2 percent to $6.07.