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Fonterra likely to cut forecast payout to farmer shareholder

Fonterra Cooperative Group is expected to cut its forecast payout to farmers when it publishes first-quarter results on Thursday.

Record production in New Zealand and weak global dairy prices are seen weighing on the cooperative, which currently predicts a payment of $6.25-to-$6.50 per kilogram of milk solids for the 2019 season, down from a previous forecast of $6.75/kgMS and the $7/kgMS opening prediction in May. Fonterra paid $6.69/kgMS in the 2018 season.

Global dairy prices are down around 21 percent since mid-May and supply – in particular from New Zealand – has continued to ramp up to record levels.

Fonterra lowered its forecast payout in October, and since then global dairy prices have fallen by around 6 percent.

While futures pricing on the NZX Dairy Derivatives market predicts a lift in dairy prices at tonight's Global Dairy Trade auction and the following event, it is unlikely to be enough to sway Fonterra.

ASB Bank economist Nathan Penny is tipping a payout of $6/kgMS.

"I anticipate that dairy prices will remain under pressure over coming months as NZ production remains very strong. October production was a record high for any month, and we are also on course for record high production this season. Meanwhile, recent rains have all but ruled out the possibility of a drought this summer," said Penny.

If Fonterra does lower the payout to $6/kgMS and retains a domestic milk collection forecast of 1.55 billion kgMS, the total payout to its 10,000 supplier-shareholders would be around $9.3 billion versus the October forecast range of $9.69 billion-to-$10.08 billion. Fonterra paid $10.07 billion at the farmgate in the 2018 season.

However, given it is likely to lift the milk collection forecast the overall impact will probably be smaller.

Bank of New Zealand senior economist Doug Steel said the payout forecast could well be lower but any reduction wouldn't be a major surprise given the declines in the GDT auction prices.

"Current pricing and currency levels suggest a lower milk price than Fonterra is currently forecasting," he said. To meet the current forecast "it would likely require a decent improvement in international pricing over coming months." Fonterra’s forecast will ultimately depend on how it sees prices tracking over the remainder of the season, said Steel.

BNZ forecast a final payout of $6/kgMS and said there is downside risk if the auction prices don't start to improve.

ANZ Bank New Zealand agriculture economist Susan Kilsby agreed there is downward pressure on Fonterra's forecast. ANZ currently forecasts $6.10/kgMS, which includes a rebound in commodity prices prior to the end of the season.

While Fonterra has been paying farmers based on the lower end of its current forecast “it would still be prudent to revise its forecast and its advance payments down given where the market currently is,” she said.

Kilsby also notes the New Zealand dollar has been stronger than expected and this has also been moving against farmers, as dairy exports are priced in US dollars.

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