Fonterra sets $7.00 milk price for new season

A milk tanker leaves the Te Rapa Fonterra Dairy Factory. Photo / Christine Cornege

Fonterra has set an opening milk price of $7.00 per kg of milksolids for the 2014/15 season and has revised down its forecast for the current season in response to weak international product prices.

For the current season, which officially ends on Saturday, Fonterra has forecast a milk price of $8.40, down from a previous forecast of $8.65.

Along with a reconfirmed forecast dividend of 10 cents per share, the change amounted to a forecast cash payout of $8.50 for a fully shared-up farmer for the current season, Fonterra said.

The cuts to the forecasts follow a string of weak auctions on the Global Dairy Trade platform.

Fonterra said the $7.00 per kg opening forecast matched the opening forecast provided 12 months ago at the start of the 2013/14 season.

ANZ Bank, in a market commentary, said the milk price for next season was still strong by historical standards.

"On the face of it the decline in the payout between years is a drag on the economy over the coming year, but that dynamic is exaggerated," the bank said.

The coming year's payout will still be the 4th highest on record, and from a spending point of view farmers will be in a similar cash-flow situation, the bank said.

Average farm profitability is still expected to be nearly $3,500/ha - nearly three times the seven year average of $1,150/ha - the bank said.

The forecast cash payout - which comprises the forecast farmgate milk price and dividend for the 2014/15 season - will be announced in July.

Fonterra is forecasting milk supply for the new season of 1,616 million kg- up 2 per cent on the current season forecast of 1,584 million kg.

Chairman John Wilson said the new season's forecast remained historically high, but also reflected current market conditions.

"Our farmers understand the realities of dairy commodity price cycles, and will exercise caution at this early stage in the season," he said.

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Chief executive Theo Spierings said the shift in supply and demand over the past few months showed that volatility continued to exert a strong influence over the global outlook for dairy.

He said there was currently more milk available for the international market to absorb but that Fonterra expected demand from China to remain strong.

"In Russia, there will be pressure on the balance between imports and local production. These factors are expected to continue influencing the supply-demand balance," Spierings said in a statement.

High milk prices are a cost to the manufacturing, and dividend paying, side of Fonterra, which has it the past prompted the co-operative to artificially lower the milk price.

Wilson said that when the last forecast was made in late February, the forecast farmgate milk price derived under the Milk Price Manual was $9.35. The Milk Price Manual calculation is now 40 cents lower at $8.95.

When Fonterra made its last forecast in February, it was 70 cents per kg below the then Milk Price Manual calculation.

"After seeing recent improved stream returns on powders and other products, and considering the level of risk likely in the remaining three months of the financial year, the board has decided to reduce that 70 cent gap by 15 cents, to 55 cents," Wilson said.

Spierings said market volatility remained an issue, as did impact of the still strong New Zealand dollar.

GlobalDairyTrade (GDT) prices have tracked down in recent events, with the GDT price index down more than 22 per cent since a peak on February 4, 2014.

Since that date, prices for whole milk powder on GDT have decreased by 22 per cent, while skim milk powder prices are down 23 per cent.

Despite the weaker auction results, the New Zealand dollar has remained firm, Spierings said.

Fonterra 're-aligns' its Nestle South America partnership

Yesterday Fonterra said it expected to net $96 million in the next financial year following what it called a realignment of its 10-year-old Dairy Partners Americas 50/50 joint venture with Nestle.

Under the agreements, Fonterra will take a 51 per cent controlling stake in DPA Brazil, with Nestlé holding the balance.

Fonterra, together with a local partner, will acquire Nestlé's share of DPA Venezuela.

In addition, Fonterra will sell its share in DPA's milk powder manufacturing business to Nestlé and Nestlé will buy Fonterra's share in DPA Ecuador.

Dairy Partners Americas is the largest dairy company in South America, buying and processing more than two billion litres of milk each year in Brazil alone.

Fonterra chief executive Theo Spierings said the DPA joint venture had performed well for 10 years and now the time is right to realign the partnership to better reflect the respective strategies of Nestlé and Fonterra in the region.

Fonterra chief executive Theo Spierings. Photo / Dean Purcell.

The revised alliance supported Fonterra's group strategic focus on everyday nutrition in key growth markets such as Latin America, China and Indonesia, he said.

"We value our relationship with Nestlé and this high-quality agreement will see our successful alliance continue," he said in a statement.

Fonterra's managing director of Latin America, Alex Turnbull, said the region's economies had undergone considerable change during the past 10 years.

"We've seen increased prosperity in markets like Brazil with rapid urban growth and a focus on healthy nutrition driving demand for dairy products," he said.

"A bigger stake in DPA Brazil means we will be well placed to drive our volume and value growth strategy focusing on everyday nutrition offerings," he said.

Fonterra's Latin American operation drives more than 900,000 metric tonnes of volume per year and $3.5 billion in revenue from consumer dairy, foodservice and dairy ingredients. The changes to the joint venture are subject to regulatory approval