Fonterra payout-cut caution

Simon Couper.
Simon Couper.
Dairy farmers are being warned to be cautious about spending after Fonterra cut its forecast payout range for the current season by 30c - representing an estimated $500 million drop in revenue for the New Zealand economy.

The dairy co-operative announced yesterday it had revised down its 2011-12 forecast payout range before retentions to $6.45-$6.55, citing the continued softening of commodity prices.

It also announced a lower opening forecast payout range for the 2012-13 season before retentions of $5.95-$6.05, reflecting an outlook of higher dairy production around the world pushing down international dairy prices.

The GlobalDairyTrade trade-weighted index had declined 20.3% since Fonterra's last forecast of $6.35 in April, chief executive Theo Spierings said.

Dairy production levels in the United States and Europe were high, while higher-than-normal production levels in New Zealand continued. That was against a backdrop of heightened uncertainties in global markets, Mr Spierings said.

The opening forecast for the 2012-13 season, which starts on June 1, reflected a "realistic outlook" by the board towards global dairy markets over the coming season, chairman Sir Henry van der Heyden said.

"There's a lot of milk out there and prices have softened. We think that supply and demand should move more into balance later in 2012, which may help ease the downward pressure on prices.

"However, there is no consensus among outside experts on how soon we can expect to see prices recover, so it is important that we give our best possible estimates to farmers so they can plan accordingly," he said.

Federated Farmers Otago dairy chairman David Wilson said the announcement seemed "pretty much in line with expectations".

It was "probably quite a good payout" given the drop that had been experienced in the GlobalDairyTrade auction.

Mr Wilson urged farmers to be cautious over spending and redo budgets conservatively until the level of European uncertainty became clear.

New Zealand's overall outlook was looking positive, he said.

"We just have to get through this blip on the radar in the meantime," he said.

On balance, the changes were "probably a bit more positive" than Westpac or the markets had been anticipating, Westpac Dunedin private financial adviser Tony Conroy said.

The bank expected commodity prices, including dairy, to continue to come under downward pressure over the next few months. However, it expected prices to stabilise and start to recover from late 2012.

With domestic production expected to return to more normal levels after this year's stellar season, next year's payout was likely to be below the levels of the past few years, he said.

DairyNZ has urged farmers to access the best possible information to help them farm through the more challenging times of lower incomes.

While the long-term outlook was bright, the immediate focus was on how to manage in the short term, with incomes reduced from last year, DairyNZ chief executive Dr Tim Mackle said.

Farmers needed to ensure they had a good budget in place and look closely at their expenditure.

DairyNZ had planning and budgeting tools available on its website ( and valuable information could also be gained by attending farm discussion groups, he said.

Although farmers would be disappointed by the 30c drop, the move had been signalled by recent falls in the GlobalDairyTrade auction, Fonterra Shareholders Council chairman Simon Couper said. Like most other parts of the New Zealand economy, Fonterra and its farmers were at the mercy of the global economy.

"Farmers need to be prudent in their financial planning ... Like most New Zealanders, we've just to got to get on with it and hope things improve - the cows aren't going to stop producing milk just because the price isn't where we want it to be," he said.

Federated Farmers national dairy chairman Willy Leferink said farmers ought to have two budgets prepared - one in the low $5kg ms range and the other in the mid to upper $5 range.

While a downward trend in global milk prices was well signalled and farmers always knew 2012-13 was shaping up as a tough season, "a rocket" needed to be put under councils and the Government to be "absolute Scrooges" when it came to "policy bright ideas and spending".

Trade-exposed exporters such as farmers, tourism and manufacturing already faced a volatile dollar without being "tackled from behind" with fee hikes and charges, he said.

Fonterra was preparing its budget for the 2012-13 season and was targeting a net profit after tax of $670 million to $820 million, equating to 45c-55c per share.

The midpoint of that forecast was 5c per share higher than the current season midpoint. The board was yet to forecast a dividend range for 2013.

Fonterra had set the fair-value share price for the 2012-13 season at $4.52 per share, the same as the current season's price.

The co-operative would not be issuing dry shares during the 2011-12 end-of-season period before the launch of Trading Among Farmers.

Shares would still be issued in anticipation of valid increases in farmers' production for the 2012-13 season.

The board made the decision to minimise the risk of farmers making decisions about buying dry shares ahead of receiving the offer documents in support of the TAF launch, Sir Henry said.


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