KEY POINTS:
Dairy co-operative Fonterra is holding back money from a record payout to farmers and cutting forecasts in the face of market volatility.
Falling global dairy prices mean it is predicting a lower payout to farmers next year, which could deliver as much as $1.2 billion less to the New Zealand economy.
The dairy giant's annual result was released amid a deadly milk powder scandal involving its 43 per cent-owned Chinese dairy company San Lu. Fonterra said yesterday it had written down the Chinese investment by $139 million. Fonterra, which accounted for a quarter of New Zealand's export earnings in the year to May, announced revenue of $19.5 billion for the 14 months ending July 31 and confirmed a final payout of $7.90 per kg of milksolids.
However, chairman Henry van der Heyden said the board had decided to hold back 24c per kg of milksolids.
"We have decided to make these retentions to protect the balance sheet at a time when there's a lot of uncertainty in the currency markets, in the commodity market and also in financial markets," van der Heyden said.
"The balance sheet is not under pressure, but we need to ensure it remains that way given the impact of current market conditions on our cost of capital."
The opening forecast for the 2008/2009 season was dropped from $7 to $6.60 per kg of milksolids.
"With buyers playing a waiting game, there is the possibility of further softening of prices before supply and demand come back into balance," van der Heyden said.
"Although the New Zealand dollar has been moving in our favour this season, we can't be confident that a lower currency will fully offset price movements."
Chief executive Andrew Ferrier said it had been a "bizarre" year, including record commodity prices, a collapse in US financial markets and food riots. When setting the opening forecast Fonterra had expected prices to drop this year, Ferrier said.
Last year's high prices had a significant impact on consumer demand in many parts of the world, while also driving higher supply in some markets including the United States.
"What we expect is the incremental supply will work its way through the market and then the market will recover again," he said.
"The trick in predicting the payout for the full year at this early stage is knowing how far the prices will drop and then when they will recover."
The forecast payout would be reviewed in December.
An average exchange rate that was 7c higher for the season at 74c had been offset by a 63 per cent increase in weighted US dollar average sales prices.
Commodities and ingredients divisional sales revenue was $13.5 billion, while Australia and New Zealand was $3.3 billion, Asia and Middle East was $1.9 billion, and Latin America was $789 million.
Fonterra collected 1192 million kg of milksolids, which was 4.3 per cent down on the previous season because of drought. ASB economists forecast the 2009 season payout would stay at $6.60 but would drop to a $6 range in 2010 and below $6 in subsequent seasons.
Westpac economist Doug Steel forecast a $6.90 payout for the current season. He predicted a 9 per cent rise in milksolid production this year.
Federated Farmers dairy chairman Lachlan McKenzie said a drop in payout from $7.66 last season to $6.60 in the current year was equivalent to sucking $1.2 billion out of the economy.
"Bearing in mind the champagne corks popped over the billion dollar gain from the proposed multilateral free trade agreement with the United States, this is more than offset by the $1.2 billion that will be lost to the economy over the next 12 months."
However the amount of revenue coming into the country would still be greater than previous years, Steel said.
FONTERRA
* Revenue of $19.5 billion for the 14 months ending July 31.
* Record payout of $7.90 per kg of milksolids.
* 24c per kg retained to strengthen the balance sheet.
* $9.1 billion distributed to farmers.
* $139 million write-down of investment in San Lu.
