Fonterra revises payout forecast for 2008/09 season
Fonterra Co-operative Group has announced a revised forecast payout for the 2008/09 season of $5.10 per kilogram of milksolids. This is a 90 cent reduction in the previous forecast of $6.00 per kgMS in November 2008.
Fonterra Chairman, Henry van der Heyden, who signalled the likelihood of a payout reduction in late December, said the lower forecast reflected the continuing decline in international commodity prices coupled with the ongoing effects of the global financial crisis, including significant fluctuations in the Kiwi currency.
“It’s clear now that the financial crisis is hitting the global economy hard, and dairy has been impacted along with most other commodities. The surplus global supply that was driven by the previous very high dairy prices, together with the contraction in global demand as a reaction to the high prices for dairy commodities has been unprecedented in terms of how fast and how far it has driven prices down.”
“Since the beginning of the year commodity prices have continued to fall substantially and we have seen the EU reinstate export refunds for its dairy products. In addition, as part of the scenarios we have developed looking forward, we are now taking a much more pessimistic view than we were at the end of last year. This reflects the worsening impact of the global economic environment.
“Although the state of the dairy market means uncertainty remains high in the short to medium term and forecasting is extremely difficult, the revised forecast payout follows an intensive market assessment by Fonterra over recent weeks,” Mr van der Heyden said.
The $5.10 per kgMS forecast comprises a Milk Price of $4.65 per kgMS, down 95 cents, and a Value Return forecast of 45 cents per kgMS. This is a five cent increase in the Value Return component and is the result of improved margins in both our ingredients and international consumer brands businesses.
Fonterra also announced a change to the timing for payment of the Value Return component. Normally, this is paid in two tranches – April and October – but the April 2009 payment will be deferred and a single payment is anticipated to be made in October once the annual payout is finalised.
“The Board is conscious that this is going to have an impact on farmers’ cashflows. But we need to be prudent given ongoing market uncertainty and the need to maintain a strong balance sheet. For this same reason the Board is reserving its position on retentions. The level of redemptions for next season will be a big determining factor,” Mr van der Heyden said.
Fonterra CEO, Andrew Ferrier, said the downturn in dairy prices had been driven by a combination of factors resulting in a serious imbalance between supply and demand. Global dairy production was high following several years of rapidly rising prices. Consumption was affected by weak consumer confidence in reaction to recent higher prices, and the consumption drop has been exacerbated by the significant global economic downturn.
“Our customers are cautious and hesitant with their commodity purchasing decisions in the current market. It is difficult for our customers to read consumer trends like they used to, and pressures on their own working capital from the financial crisis mean they want to limit the amount of product inventory they are carrying.”
Mr Ferrier said the newer, worrying trend was government intervention in the dairy market. Any regional subsidies or intervention had the potential to distort the market, potentially delaying recovery to more sustainable price levels.
“The macro-economic outlook and dynamics within global dairy markets suggest the industry is in for a difficult 12 to 18 months. Our analysis also indicates the strength and pace of market recovery will vary from country to country, depending on local and regional factors,” said Mr Ferrier.
“We believe that Fonterra’s global market position and focus on a strong balance sheet places us in a better position than many of our competitors to work through these immediate challenges and seek to capitalise on the recovery as and when it occurs.”
Mr van der Heyden said that given the extreme volatility and uncertainty in global economic and business conditions, the Board has also been mindful of its obligations to call for a further estimate of the Fair Value Share range should circumstances change substantially since the estimate announced in December. “At this time, the Board does not consider a further estimate to be warranted.”
