Milk powder prices might be soaring but cheese and casein
are generating much lower returns for Fonterra. Photo by
Fonterra has unexpectedly left its forecast milk price
unchanged at $8.30 and slashed its dividend by 22c, due to what
it describes as an ''extraordinary situation''.
The surprise announcement yesterday means a forecast payout
of $8.40/kg ms for the 2013-14 season, much lower than the
predictions of some economists who thought it could tip the
$9 mark, although still a record.
Fonterra has attributed its decision to the disparity between
very high milk powder prices, and those for cheese and
Market reaction was most pronounced in the Fonterra
Shareholder Fund, as units dropped as low as $5.48, below
last year's issue price of $5.50.
The forecast 10c dividend meant lower farmer incomes by about
$300 million this season, on a fully shared up basis.
However, that must be put in the context of a $4 billion
increase in farm income compared with last season, ASB rural
economist Nathan Penny said.
Fonterra chief executive Theo Spierings said the co-operative
had devoted the maximum possible volume of milk to whole milk
and skim milk powder streams this season.
However, it had not been able to lift powder production above
the current 70% level as it was limited by its production
The remaining 30% of milk was converted to cheese and casein
which were generating lower returns, caused by domestic
factors in key markets such as Europe, the United States and
Fonterra chairman John Wilson said the board had the
discretion to pay a lower farm-gate milk price than that
specified under the milk price manual, which would have
resulted in it rising to $9.
Given the current volatility, the forecast might change over
the course of the season, Mr Wilson said.
Fonterra Shareholders Council chairman Ian Brown said the
board's stance was a practical decision, given the unusual
The forecast milk price was still a record and, with a 30c
increase in the December advance rate payout to $5.80,
farmers could continue to feel positive about the outlook for
the season, Mr Brown said.
Federated Farmers dairy chairman Willy Leferink said farmers
would be pleased with the confirmation of the $8.30 forecast,
but less pleased to see the dividend forecast cut by
The dividend was a direct marker to the financial performance
of Fonterra as a company, he said.
Management needed to note concerns that shareholders would
have on the value-add, which seemed to be struggling, he
Forsyth Barr broker Andrew Rooney said that yesterday's
announcement did little to ease Forsyth Barr's concerns over
the conflicts of interest inherent in the Trading Among
Fonterra was attempting to manipulate returns to farmers -
its most important stakeholders - and ease the impact on unit
That manoeuvring would only increase uncertainty as to
co-operative behaviour in future. Forsyth Barr retained its
reduce recommendation, he said.
Fonterra Shareholders Fund has been downgraded to a sell by
Craigs Investment PartnersIn a research report, the firm said
it was looking for Fonterra to show signs of improved
underlying earnings performance associated with its strategy,
a greater degree of transparency and visibility in the
business, and for a turnaround in the underperforming
Australian operations, over the next 12 months.