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Fonterra pessimistic says Deutsche Bank

Fonterra 2010 forecast pessimistic says Deutsche Bank

By Paul McBeth

May 27 – Fonterra Cooperative Group’s forecast payout for the 2010 season could be overly pessimistic because the kiwi dollar may retreat from a seven-month high, while the global economy slump may be past its worst, according to Deutsche Bank.

The world’s largest dairy exporter announced an opening forecast payment for the 2010 season of NZ$4.55 per kilogram of milk solids, a decline of 13% from this season’s NZ$5.20 per kg. Fonterra blamed the lower forecast on the strength of the New Zealand dollar, which jumped 27% from its sub-50% U.S. cents low early in March.

Deutsche Bank chief economist Darren Gibbs said dairy payouts had come down significantly from the NZ$7.60 peak last season, and that although the dairy cooperative would see weaker revenues, farms would also benefit from cheaper operating costs.

“It could be Fonterra under-promising and over-delivering,” Gibbs said. “The kiwi has extended a long way ahead of commodity prices” and any pull-back would give the dairy exporter more breathing space, he said.

Dairy products account for some 20% of New Zealand’s annual NZ$43.2 billion export market, and any reduction in this revenue will impact on the wider economy, Gibbs said. Milk and cheese exports rose 4.8% to NZ$8.9 billion in the 12 months to April 30, according to government statistics.

Positive signs are beginning to appear in the economy, Gibbs said, and global sentiment supports the prospect that the downturn has past is nadir.

Gibbs doubts the reintroduction of dairy subsidies by the U.S. government played much of a role in the forecast, with it too early to say how the subsidies will impact on the market.

“There’s potential for a tit-for-tat” response between the U.S. and Europe, and that could have an adverse impact on New Zealand’s dairy industry, he said.

Federated Farmers said the new subsidies “snuffled out” any optimism about the dairy sector, with the low forecast likely to weigh negatively on the economy.

“If you live in the city and think you’re immune from this, think again,” said Lachlan McKenzie, dairy chairman for Federated Farmers. “It’s a hell of a lot of money that isn’t coming through the front door of the economy.”


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