Wednesday, 24 September 2014 08:50

Further downside risk- Fonterra

Written by Sudesh Kissun

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Fonterra chairman John Wilson says there is further downside risk to its 2014-15 forecast payout.

He made the comments as the co-op slashed its payout by 70c/kgMS; Fonterra reduced its forecast farmgate milk price for the 2014-15 season from $6.00 to $5.30/kgMS, and increased and widened the estimated dividend range from 20-25 cents per share to 25-35 cents – amounting to a forecast cash payout of $5.55-$5.65/kgMS for the current season.

Wilson says the lower forecast farmgate milk price reflected continuing volatility, with the GlobalDairyTrade price index declining 6% in the past two trading events.

"The market is currently influenced by strong milk production globally, the impact of Russia's ban on the importation of dairy products, and the levels of inventory in China. Some relief has been provided by exchange rates, with the NZ dollar recently showing some signs of falling against the US dollar.

"Under the current market conditions, there is further downside risk. However, the forecast reflects expectations that prices will increase in the medium term," says Wilson.

Fonterra chief executive Theo Spierings says the estimated dividend range reflected the positive impact of a lower forecast farmgate milk price on product margins but also significant volatility in commodity prices.

"A lower forecast farmgate milk price reduces input costs in our consumer and foodservice businesses. In turn, we do expect to deliver increased returns as a result of a recovery in margins on our products.

"In addition, stream returns for non-reference commodity products such as cheese and casein are currently making a positive earnings contribution, but it is still very early in the financial year.

"With volatility in commodity prices, a wide range of outcomes are possible in relation to stream returns. The wider dividend range reflects this volatility, and at this stage of the financial year, it is not realistic to be able to accurately forecast the final result for the year within a narrower range."

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