Fonterra forecast $3.85 plus 40-50c/share

Fonterra’s forecast payout has dropped from $5.25 per kilo of milk solids to $3.85 plus 40 to 50 cents a share.

In a newsletter to shareholders chair John Wilson says:

The Farmgate Milk Price forecast has been reduced from $5.25 per kgMS to $3.85 per kgMS due to the continued significant imbalance in the global dairy market between surplus supply in 2014 and current weak demand.

This imbalance and the challenge of lower prices continuing for longer than anticipated is a global issue, and one with which dairy farmers globally are increasingly grappling.

Current prices are unsustainably low and we are seeing them beginning to impact production levels globally.  We have confidence that prices will recover over the course of the season.

This is going to be a tough season, and we encourage you to make your decisions based on today’s forecast Milk Price.  We will update as the season progresses.

We have adjusted the Advance Rate in accordance with our policy.  We need to balance protecting our Co-operative while we have this volatility, with getting cash to you. . .

Forecast total payout available to farmers

We have announced $4.25 – $4.35 forecast total payout available to farmers for 2015/16.  It is made up of:

  • the revised forecast Farmgate Milk Price of $3.85 per kgMS
  • an earnings per share range of 40 – 50 cents.

We have returned to using a forecast total payout available figure to provide clarity on business performance, consistent with the way we have previously reported to you.

The forecast earnings are expected to be influenced by:

  • the positive impact of the lower Farmgate Milk Price on consumer margins globally for New Zealand-sourced products
  • the contribution from changes being made within the business
  • movements in New Zealand product mix returns.

The final decision on what is paid as a dividend will be based on our policy of paying out 65-75 per cent of adjusted Net Profit after Tax over a period of time, at the Board’s discretion.

At this stage in the season, budget on a forecast Cash Payout for 2015/16 season of $4.15 – $4.20.  This includes an estimated dividend range of 30– 35 cents per share. . .

The company can’t control global supply and demand but shareholders are asking why it set the opening price so high.

That price is what farmers and sharemilkers use to set budgets and make decisions on numbers of staff, amount of supplements, whether or not to buy extra feed and if so at what price, and other factors over which they have some control.

Everyone else appears to have known about factors like Russian boycott, the Chinese stock pile, the end of EU quotas and low feed prices in the USA which would all impact on supply, demand and price.

If the company didn’t know it should have, if it did it should have set a far more conservative opening price.

It is better to be conservative, set a lower opening price and increase it later than to set a higher price and have to reduce it.

Agribusiness professor Jacqueline Rowarth has called for a vote of no-confidence in the board.

I don’t think that’s likely but directors up for re-election should face strong nominees contesting them.

As for the rumour that there would be a second announcement today – nothing confirmed so far.

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