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CORRECT: Signs mount that Fonterra will have to cut forecast

CORRECT: Signs mount that Fonterra will have to cut its payout forecast


(Fixes Fonterra's current forecast in third paragraph)

By Jenny Ruth

Nov. 19 (BusinessDesk) - The risks are mounting against Fonterra holding its current forecast milk payout and this week's GlobalDairyTrade auction could be yet another nail in its coffin.

The auction results will be released early Wednesday, New Zealand time.

Fonterra's current forecast is a rate of $6.25-to-$6.50 a kilogram of milk solids but Mark Lister, the head of wealth research at Craigs Investment Partners, says the trends in both dairy pricing and the renewed strength in the kiwi dollar could see the actual payout settle closer to $6.00 or $6.25.

“Dairy hasn't been going well. It's just been steadily drifting lower and now we've got the New Zealand dollar going in the other direction as well,” Lister says.

The headline GDT index fell 2.1 percent at the last auction and that was the 15th decline in the past 18 fortnightly auctions.

“Dairy prices are now 17.7 percent below the 2018 peak back in May and 6.2 percent lower year-to-date,” he says.

Global dairy products are priced in US dollars and the New Zealand dollar has been trending higher against the greenback since early November.

The kiwi gained more than 2 percent against the US dollar last week, taking its gains for November so far to more than 5.5 percent, although it is still down more than 3 percent from where it began this year.

The kiwi's rise has been fuelled in part by the unexpected fall in the unemployment rate to 3.9 percent in the September quarter, a more than 10-year low. Economists had expected either a steady rate of 4.5 percent or a slightly higher outcome.

Lister says most people are becoming more convinced that Fonterra won't make its current forecast.

“It's hard to see a big turn-around in the trend the trend this week – the most we can probably hope for is some stability – they've got a long way to go to get back to where they were.”

Still, “anything that starts with a six is probably satisfactory, but obviously higher would be better.”

Usually, New Zealand dollar strength means the US dollar is retreating, but not at the moment – the greenback is still rising. It's just that the New Zealand dollar has been rising even more.

One factor fuelling the US dollar's rise this year has been expectations that the Federal Reserve will keep raising interest rates as the US economy continues to perform strongly.

However, the Fed's vice chair, Richard Clarida, put a little spoke in that wheel last week when he said that monetary policy is getting closer to a neutral level.

Lister says that, despite this, he still expects the Fed to raise interest rates again in December.

Market pricing still backs this view with a December hike 68 percent priced into the markets, although that's down from 75 percent a week ago.

The Fed is “very data driven,” Lister says, and data last week showed inflation running at an annual pace of 2.5 percent and that retail sales rose 0.8 percent in October, beating forecasts for a 0.5 percent increase.

But this sort of data is all backward looking.

“When you look at the company reporting season and the outlook statements, there's a little more caution creeping in,” Lister says.

“There's a lot of talk about things slowing down and the impact of tariffs. I think that's why the share market's been as jumpy as it is.”

New Zealand's benchmark NZX 50 Index shed 1.4 percent last week, taking its quarter-to-date losses to almost 6 percent, although it is still 4.9 percent higher than it began 2018.

The broad measure of the US stock market, the S&P 500 Index, fell 1.6 percent last week.

Yet another spanner in the works of the strong economic growth story in the US is that West Texas Intermediate crude oil tumbled another 5.3 percent last week, the sixth consecutive week of declines, taking losses in that period to more than 25 percent.

“Why it's worrying is because we've got all these other things to worry about. When people see the price of oil tanking 25 percent in the space of a few weeks, it's another thing that spooks the market,” Lister says.

(BusinessDesk)

ends

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