Fonterra trims last season’s forecast

John Monaghan
John Monaghan
Fonterra has trimmed last season’s forecast farmgate milk price by 5c to $6.70, and is unlikely to pay a final dividend this year.

On Wednesday, the dairy giant placed a trading halt on its units on the NZX as it worked through reviewing its earnings guidance.

Yesterday, it announced the milk price forecast revision and updated its normalised earnings per share and dividend guidance.

The previous announced 25c-30c guidance range had been held, but the co-operative indicated it would be at or slightly below that range, and it was likely the full-year dividend would be just the 10c already paid in April.

Farmers’ revenues for the 2017-18 season would be about 10c-15c lower per kilogram than they might have previously been expecting to receive.

New chairman John Monaghan said the higher milk price — which was good for farmers —  put pressure on Fonterra’s balance sheet in a year which was already challenging due to the $183 million settlement with Danone and the impairment of the co-operative’s Beingmate investment.

"You never want to have to reduce the milk price at the season’s end, but it is the right thing to do, and $6.70 remains a strong milk price," he said.

"During the process of closing our books for the financial year end, the need for these actions has become clear.

"Our forecast performance is not where we expected it would be. While the numbers are not finalised, our margins were less than we forecasted right across our global ingredients and consumer and food-service businesses," he said.

Fonterra Shareholders Council chairman Duncan Coull expressed his "absolute disappointment" with the announcement, saying the situation was unacceptable.

"While [the] council acknowledges that part of governance is managing risk, another key responsibility is to create long-term value for shareholders. Given [the] announcement, the question is ‘how effectively is this being done?’ Shareholders and all New Zealanders have valid expectations that Fonterra delivers," he said.

The board and management had some challenges ahead in rebuilding confidence through consistent performance and prudent management of shareholders’ capital.

Board and management could look forward to "some very challenging discussions" with the council over the coming weeks and it would be seeking a very clear understanding of the plans being implemented in order to restore confidence in the shareholder base, Mr Coull said.

Since May, overall dairy prices had fallen 9%, with whole milk powder prices down 8%, ASB’s latest Farmshed Economics report said.

Notably, once-strong butter prices had plunged 17%. Initially, with global demand still firm, a quick price rebound looked possible, but that no longer appeared likely, senior rural economist Nathan Penny said.

The catalyst for change had been the escalation in US-China trade tensions, but the mechanism through which dairy prices had been impacted had been currencies. The Chinese yuan had fallen against not just the USD, but also the NZD.

The falling yuan had stinted Chinese buying power and lowered demand from New Zealand’s number one dairy market.

The longer trade tensions dragged on, the more likely the yuan was to stay at that lower level, with Chinese dairy demand likely to stay lower, too.

There was risk to ASB’s 2018-19 milk price forecast of $6.50 and Fonterra’s $7 forecast. The bank had already factored in some downside risk from improved New Zealand production this season, but lower global dairy demand came on top of that.

The low NZD was providing some offset, but not by enough to fully offset the overall dairy price fall, Mr Penny said.

There was no change to Fonterra’s $7 forecast, and Westpac senior economist Anne Boniface said the bank continued to view that forecast as optimistic.

Fonterra’s full-year results will be announced on September 13.

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