High dollar curbs dairy payout

However, farmer returns will remain at the mercy of the high New Zealand dollar.

Fonterra, last  , revised its 2012-13 payout forecast range by 30c to $5.65 - $5.75/kgMS blaming the rising Kiwi dollar.

Co-op chairman Henry van der Heyden says the revised payout factors the currency remaining at its current level and prices firming in coming months.

He says the crippling drought across much of the US has pushed up corn prices. As input costs rise, US farmers will be forced to cull cows, leading to drop in milk production. This will put pressure on global milk supply.

Van der Heyden says a wet summer in parts of Europe and lack of monsoon rain in India, the world’s largest milk producer, could also impact supply.

“So we expect dairy prices to increase as the global milk supply comes under pressure,” he told Rural News.

“While we’re disappointed to revise the payout forecast range, it’s driven solely by the currency and there’s nothing we can do about that.”

The revised Fonterra forecast comprises a lower farmgate milk price of $5.25/kgMS, down from $5.50/kgMS and a lower forecast net profit after tax range of 40-50 cents, down from 45-55 cents per share.

But Fonterra’s payout range is higher than rivals Westland Milk ($5 - $5.40/kgMS) and Open Country ($5.30-$5.50/kgMS).

Van der Heyden says Fonterra is optimistic prices will rise and has factored that in the revised payout.

Overall, the GDT trade weighted index was up 4.1% over the past four events, underpinned by a 7.8% rise on August 15.  However, prices are low compared to a year ago.

“We’ve actually seen improving prices in recent GlobalDairyTrade (GDT) trading events, but the strength of the Kiwi dollar is eroding any gains,” says van der Heyden.

He urges farmers to budget cautiously. Fonterra is maintaining current advance rate payments to farmers.  This would mean no change to farmers’ cash flows, he says.

The high currency is also affecting Fonterra’s consumer businesses. A difficult retail environment affecting the Australia-New Zealand business isn’t helping either.

Fonterra chief executive Theo Spierings says this has led to the lowering of net profit after tax range to 40-50 cents a share.

Spierings agrees that there appears to be some early signs of strengthening dairy prices, partially driven by global weather events.

However, any gains would continue to be impacted by the strong New Zealand dollar, he says.

“Our forecasting anticipates some recovery in global dairy prices but we don’t know how strong this recovery will be or when it will kick in.  

For this reason, our farmer shareholders should continue to plan cautiously.”