Bad news for Fonterra farmers

The 60c drop from its previous forecast of $5.30/kgMS had been widely expected.

The co-op is still sticking to its estimated dividend range of 25-35 cents per share; this amounts to a forecast cash payout of $4.95 – $5.05 for the current season.

Chairman John Wilson says that although farmers were expecting this lower forecast, the revision will put pressure on their farming business budgets.

"There is still considerable volatility in global dairy markets," says Wilson.

"Right now we are seeing a number of factors that are delaying a sustained return to higher global prices."

The global milk supply remains greater than demand, which has resulted in GlobalDairyTrade prices for Whole Milk Powder falling 16.9% since late September, while Skim Milk Powder prices have fallen 7.7%.

"Falling oil prices, geopolitical uncertainty in Russia and Ukraine, and subdued demand from China as it continues to work through inventory are all contributing to ongoing volatility and weak demand," says Wilson.

"Today's revised forecast reflects the Board and management's best estimates at this time. Given the uncertainty we are advising farmers to continue to be cautious with budgeting and we will update them as the season progresses."

Chief Executive Theo Spierings says Fonterra was undertaking a targeted programme to generate more cash to support farmers.

"Cash is important for our farmers and for our cooperative," Mr Spierings said. "We will be further strengthening our tight controls on operating expenditure, and will be driving harder on working capital, and deferring capex – provided this does not slow progress on our V3 business strategy.

"This is a clear signal to farmers that we are all in this together. We are tightening our belts, just as they are."

The board expects to look at the estimated dividend range at the time it announces its Interim Result.