Nervous wait for Fonterra update

Fonterra will update the market tomorrow on its earnings and the impact of the drought. Photo by...
Fonterra will update the market tomorrow on its earnings and the impact of the drought. Photo by Stephen Jaquiery.
Fonterra will update the market tomorrow on its half-year earnings and the impact of the dry conditions on its production, an announcement awaited with some nervousness by farmers and the market alike.

ASB rural economist Nathan Penny said yesterday ASB had lowered its 2014-15 season milk price forecast by 30c to $4.70 a kilogram of milksolids for three reasons.

The New Zealand dollar was expected to stay above US70c for the foreseeable future.

New Zealand milk production was not as bad as first feared.

At this late juncture, more weight was being placed on Fonterra's updates.

The change in the dollar view came as the New Zealand economy regained strength.

While the US economy was improving, expected interest rate rises there were likely to proceed more slowly than anticipated, he said.

Whole milk powder auction prices surged more than 35% over the first two months in the year but it had since rained in many parts of the country and Fonterra had increased its auction volumes and forecast annual auction supply.

''We expect this season's Fonterra milk production to be down 1% compared to last season - nationwide, for all processors, we expect production to be par with last season.''

At the previous update by Fonterra in February, the co-operative held its forecast steady despite the surge in prices, Mr Penny said. In contrast, ASB lifted its forecast by 30c.

Given prices had since fallen, it was unlikely Fonterra would announce an upgrade to its forecast tomorrow.

ASB expected there to be some upside risk to Fonterra's previously announced dividend range of 25c to 35c per share.

''The lower milk price has helped Fonterra's margins. Moreover, Fonterra has signalled it has been tightening its belt. Assuming it has been successful in doing so, there may be scope for the dividend rise.''

Farmers had begun to respond to lower global farmgate milk prices by slowing their production.

Dry conditions in New Zealand had also played a part.

As that happened, demand was expected to firm in the second half of the year, particularly as the Chinese economy perked up, aided by lower energy prices and lower interest rates, Mr Penny said.

The risks to next season's forecast were now on the down side. Given prices at recent auctions had fallen, there was potential for further falls.

In that scenario, prices would start the season lower, meaning they would have to lift more over the season to achieve ASB's forecast of $6.50 kg/ms.

Last week, the recent rebound in dairy prices from December lows was halted.

The latest GlobalDairyTrade auction had the headline price index falling 8.8% and whole milk powder prices, as well as all other commodities covered, down 9.6%.

Craigs Investment Partners broker Peter McIntyre said reasons for the fall seemed to be a combination of a stronger US dollar, which reduced the price of goods prices, such as dairy products, more competitive European producers and a more moderate impact of recent dry weather.

''Fonterra is sticking with its $4.70 kg/ms forecast and most economists seem to be maintaining forecasts around the same levels.''

Mr McIntyre expected a ''significantly improved'' result and dividend from Fonterra and some comment on international commodity markets.

Retailers Kathmandu and Hallenstein Glasson report respectively today and Friday with interest being in whether Kathmandu has stemmed the flow of red ink to its bottom line.

Otherwise, the domestic calendar was quiet, he said.

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