Fonterra Co-operative Group has once again reduced its forecast Farmgate Milk Price for the 2015/16 season from $NZD4.60 per kgMS down to $NZD4.15 per kgMS.
When combined with the earnings per share range of 45-55 cents, this means a total available for payout of $NZD4.60-$NZD4.70 per kgMS and would currently equate to a forecast Cash Payout of $NZD4.50-$NZD4.55 per kgMS to New Zealand dairy farmers after retentions.
CEO Theo Spierings said that although global demand remained sluggish, Fonterra supported the general view that dairy prices will improve later this calendar year.
“The time frame for supply and demand rebalancing has moved further out and largely depends on a downward correction in EU supply in response to the lower global prices. These prices are clearly unsustainably low for farmers globally and cannot continue in the longer term.”
And despite the perceived increased demand from regions such as Asia, according to Kelvin Wickham, Fonterra’s Managing Director of Global Ingredients, the reality is somewhat more complex with the global demand for dairy continuing to lag.
“The main factors affecting demand are declining international oil prices, economic uncertainty in a number of emerging economies and a slow recovery of dairy imports into China.”
“On the supply side, in Europe, milk volumes have continued to increase significantly and these surplus volumes are being exported. In addition, the Russian ban on European Union dairy imports has pushed more product onto the world market,” said Wickham.
“Declining international oil prices have weakened the spending power of countries reliant on oil revenues, many which are major dairy importers, contributing to the weaker demand for dairy being seen globally.”
“It is an imbalance between supply and demand that continues to put pressure on global milk prices,” added Wickham,
“Fonterra supports the general view that dairy prices will improve later this calendar year – but this largely depends on a downward correction in EU supply in response to lower global prices,” he said.
Asked about the pain that low farmgate prices give to the farmers, Wickham noted that there was no question this reduction will be tough on New Zealand’s farmers.
“Fonterra will look at options to assist farmers with on-farm cash flows, underpinned by the expected improvement in dividend returns and the financial strength of the Co-operative.”
However, for the medium to long term outlooks, the global dairy giant remains optimistic, at least publically, with CEO Spierings pointing out, “while a unique series of global issues are impacting the forecast Milk Price, the business is performing well, as outlined in our business update in November, and is on track to generate improved dividend returns.”
“Fonterra has remained focused on reducing costs, increasing efficiencies and shifting more milk into higher value products,”
“It is important to state that despite the current challenges, we have confidence long term international dairy demand will continue its expansion due to a growing world population, increasing middle classes in Asia, urbanisation and favourable demographics,” concluded Spierings.