UPDATE: Fonterra slashes payout, $430M support to farmers

UPDATE: Fonterra slashes payout, farmers offered $430M cash advance

(Adds comments from CEO and chairman, starting in fourth paragraph.)

By Fiona Rotherham

Aug. 7 (BusinessDesk) - Fonterra Cooperative Group, the world’s largest dairy exporter, has slashed its farmgate milk price for the 2015/16 season by $1.40 to $3.85 per kilogram of milk solids but is supporting cooperative members with an additional 50 cents per shared-up kilogram of milksolids in the form of an interest-free loan.

The initiative softens the blow for farmers, who've seen prices tumble from $8.40 pert kg/MS in 2014, but comes at a cost to the cooperative's balance sheet of as much as $430 million.

Following a board meeting today, the Auckland-based company said the forecast payout for the current season, the lowest in nine years, follows a persistent global imbalance between demand and supply. It’s the first time the cooperative has used the strength of its balance sheet - in this case one-off gains from its current transformation project - to support farmers who will be struggling to make ends meet after two seasons of very low payouts.

Chief executive Theo Spierings said the lower forecast reflects the reality that “the market is the market”, but the cooperative's underlying result would show a record.

Key influences on that result include a positive impact of the lower farmgate milk price on consumer margins for New Zealand-sourced products, upsides from its transformation project, and movement in the New Zealand product mix returns, he said.

Fonterra forecast earnings per share of 40 to 50 cents and will decide the dividend later in the year, though it has a policy of paying 65 to 75 percent of adjusted net profit after tax over a period of time.

Westpac Banking Corp senior economist Michael Gordon said Fonterra's improved earnings per share forecast for the added-value side of the business would mean a dividend of around 32 cents a share. He said that was “not a significant improvement on last season's forecast of 20 to 30 cents per share”. Investors in the Fonterra Shareholders’ Fund have questioned why the low farmgate milk price has not delivered better dividend returns.

The company will cut its capital expenditure for the 2016 financial year by between $500 million to $600 million, with that money helping meet anticipated costs to support the cooperative with up to $430 million of advance payments, structured as an interest-free loan, equivalent to a payment of 50 cents extra per shared-up kilogram of milk solids.

The scheme will be phased in from October and will have to be paid back once the farmgate milk price or advance rate goes above $6/kgMS.

Spierings said to hit that mark, global dairy prices would need to lift to US$3,500 per tonne for whole milk powder, New Zealand's key commodity export, which he said could happen within six months to a year. In the latest GlobalDairyTrade auction this week, the price of whole milk powder sank 10 percent to US$1,590 a tonne. The company has set aside two years for farmers to repay the 50 cents per share support, and after that the loan will incur wholesale interest rates.

Fonterra chairman John Wilson said he expects dairy prices will start to rise again in the not too distant future. “We are below the bottom,” he said in response to a question on whether he thought global dairy prices had hit the bottom.

Spierings said prices had reached the point where global suppliers would start cutting production in the next quarter.

Fonterra has forecast a 2 percent drop in New Zealand milk volume for the 2015/16 season to 1.589 million kgMS, given farmers were likely to be reducing stocking rates and supplementary feeding to lower on-farm costs.

“It will be a very difficult season for farmers if current prices continue,” Wilson said. “We expect to continue seeing our farmers make these sort of on-farm decision – particularly in light of today’s announcements.”

Wilson said the board won’t confirm the milk price payout for the 2014/15 season, currently set at $4.40/kgMS, until September but he said given there was no announcement on that today, it could be inferred the board was not expecting it to change.

Every $1 decline in the milk price equates to around a $2 billion decline in farmer incomes which, in turn, impacts the regional and national economies.

The payout cut had been expected, given the plummeting of dairy prices this year due to oversupply and weak demand, particularly from China. Fonterra’s 10,500 farmer suppliers are not the only ones feeling the pain. Open Country Dairy, the country’s second-largest milk processor, last month cut its milk payout by more than $1 to between $3.65 and $3.95/kgMS and Westland, the country’s second-largest cooperative, cut its forecast milk payout by $1 to between $4.60-$5/kgMS. The only one that hasn’t so far is small Waikato-based Tatua which recently reconfirmed its opening forecast of $6/kgMS despite the volatility in global dairy prices.

Following an ongoing strategic review, Fonterra last month announced 523 jobs would go in the first swathe. Another undisclosed number of staff members were told on Wednesday whether they still had jobs, with more to come. The final number of job cuts will be confirmed in September.

Units in the Fonterra Shareholders’ Fund increased 0.6 percent to $4.69, and have fallen 22 percent in the past year.

(BusinessDesk)

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