Fonterra Co-operative Group Limited today reduced its forecast Farmgate Milk Price for the 2014/15 season from $6.00 to $5.30 per kgMS, and increased and widened the estimated dividend range from 20-25 cents per share to 25-35 cents – amounting to a forecast Cash Payout of $5.55-$5.65 for the current season.
Chairman John Wilson said the lower forecast Farmgate Milk Price reflected continuing volatility, with the GlobalDairyTrade price index declining 6 per cent in the past two trading events.
“The market is currently influenced by strong milk production globally, the impact of Russia’s ban on the importation of dairy products, and the levels of inventory in China. Some relief has been provided by exchange rates, with the NZ dollar recently showing some signs of falling against the US dollar.
“Under the current market conditions, there is further downside risk. However, the forecast reflects expectations that prices will increase in the medium term,” Mr Wilson said.
Chief Executive Theo Spierings said the estimated dividend range reflected the positive impact of a lower forecast Farmgate Milk Price on product margins but also significant volatility in commodity prices.
“A lower forecast Farmgate Milk Price reduces input costs in our consumer and foodservice businesses. In turn, we do expect to deliver increased returns as a result of a recovery in margins on our products.
“In addition, stream returns for Non-Reference Commodity Products such as cheese and casein are currently making a positive earnings contribution, but it is still very early in the financial year.
“With volatility in commodity prices, a wide range of outcomes are possible in relation to stream returns. The wider dividend range reflects this volatility, and at this stage of the financial year, it is not realistic to be able to accurately forecast the final result for the year within a narrower range.”
Mr Wilson said that the forecast Farmgate Milk Price remained reliant on increasing dairy prices in the medium term.
“The forecast Farmgate Milk Price is reduced based on current estimates of future pricing. There remains significant volatility in international dairy commodity prices and given this, this forecast is our best judgment at this time.
“As always, we recommend caution with regards to on-farm budgets in this environment of continuing uncertainty.”
The news wasn’t all bad. Fonterra confirmed a record payout for last season:
Fonterra Co-operative Group announced today a final Cash Payout of $8.50 for the 2014 year for a 100 percent share-backed farmer, comprising a Farmgate Milk Price of $8.40 per kgMS and a dividend of 10 cents per share.
Chairman John Wilson said that the Cash Payout to the Co-operative’s 10,500 farmer shareholders was the highest ever made since Fonterra’s formation in 2001.
“The Farmgate Milk Price on its own represents an injection of more than $13.3 billion to the New Zealand economy for the season.
“It is a strong result, reflecting the determination of our farmer shareholders to lift on-farm performance, matched within the business by a focus on driving revenue.
“Our farmers took advantage of good conditions to produce 1,584 million kgMS, eight percent more than last season, to make the most of the good prevailing prices early in the season.
“North Island volumes were up nine percent at 969 million kgMS, while the South Island delivered a seven per cent rise in volumes to 615 million kgMS.
“A very good spring saw our farmer shareholders achieve record milk production through an extended peak, stretching our production capacity for powders. This led to early impacts on stream returns from the less valuable products we were forced to make.”
Fonterra CEO Theo Spierings said the Co-operative had come through a very demanding year.
“We have continued to stay on track with our strategy, focusing on securing the best returns to our farmer shareholders.
“We achieved record revenue of $22.3 billion for the year, a direct result of the focus on achieving the highest possible revenue line that is good for the Farmgate Milk Price.
“Constrained margins in our foodservice and consumer businesses and on non-milk powder products were the knock-on effect, contributing to a 27 per cent rise to $19.8 billion in the cost of goods sold. However, we maintained our focus on efficiency and achieved a two per cent reduction of $46 million in our operating costs.
“Our higher cost of goods sold, along with higher interest and taxation, saw our net profit after tax decline by 76 per cent to $179 million.” . . .
The cut in this season’s forecast was expected and last season’s record payout will be some compensation.
However, the reduced payout will impact not just on farmers but the people and businesses who service and supply them and the wider economy.
When the price goes up there’s always calls from the left for farmers to subsidise consumers.
There won’t be a call to subsidise farmers now the price has gone down, nor would we want it.