Fonterra's 2017 opening forecast below expectations

Fonterra's 2017 opening forecast below expectations at $4.25/kgMS

By Paul McBeth

May 26 (BusinessDesk) - Fonterra Cooperative Group's first forecast for the 2016/17 farmgate milk price has come in below expectations at $4.25 per kilogram of milk solids and the world's biggest dairy exporter will keep using its balance sheet to prop up its farmer shareholders.

The Auckland-based cooperative said the forecast accounted for a strong kiwi dollar, global over-supply, international inventory levels and the economic outlook for major dairy importers. Fonterra kept its forecast for the current season at $3.90/kgMS.

"Conditions on-farm are very challenging. The strength of the cooperative's balance sheet is enabling us to increase the advance rate in the first half of the new season," chairman John Wilson said in a statement. "We will also bring forward payments for this season's milk. This will provide some assistance with on-farm cashflows."

Fonterra has been using its balance sheet to help keep farmers solvent as the slump in global milk prices eroded their income and kept the farmgate forecast below the level needed for many farmers to break even.

Today's forecast was lower than economists were expecting, with a BusinessDesk survey last week predicting an opening forecast payout of at least $4.43/kgMS, rising to as high as $6/kgMS by the end of the season.

Wilson said he expects global prices to gradually improve over the season as international production is reined in response to weak prices. July Fonterra will project 2017 earnings per share, which is paid out as a dividend to farmers, in July.

Chief executive Theo Spierings said global demand is likely to increase by an annual pace of 2-to-3 percent on the world's expanding population and growing Asian middle classes. He expects that will lead to a rebalancing of the international market.

"We will remain focused on securing the best possible returns for our farmers by converting their milk into high-value products for customers around the world," Spierings said.

(BusinessDesk)

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