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FONTERRA IS maintaining its forecast farmgate milk price at $8.30kg/MS for the 2013/14 season.
This is 70c/kgMS below the theoretical farmgate milk price of $9/kgMS calculated in accordance with the milk price manual. Fonterra is using the discretion it has to do this under abnormal circumstances, which in this case is the big gap in price between whole milk powder and other products.
Chief executive Theo Spierings says "doing nothing, and forecasting a farmgate milk price that is higher than we can afford to pay at this stage in the season, is not an option".
The estimated full year dividend has dropped by 20c to 10 cents per share - delivering a forecast cash payout of $8.40.
The board has also approved an increase in the advance rate with the December payment, paid in January 2014, increased by 30c to $5.80.
Fonterra's forecast EBIT (earnings before interest and tax) for the financial year ending July 31, 2014 is $500-$600 million.
Chairman John Wilson says milk powders are continuing to sell at very high prices because of the strong global demand and limited supply.
"Only four months into the season, we are in an extraordinary situation. The gap between prices for milk powders compared to cheese and casein is greater than it has ever been before," he says.
"The high powder prices are good for our farmer shareholders, and good for New Zealand.
"The forecast farmgate milk price, which is calculated under the milk price manual, is based on processing and manufacturing milk powders. The calculation is also based on the costs involved in production for an efficient manufacturer of Fonterra's size and scale.
"However, Fonterra's actual asset base includes a number of cheese and casein manufacturing plants which means that we are not able to maximise profits from these plants in the current environment.
"In such abnormal circumstances, the board has the discretion to pay a lower farmgate milk price than that specified under the manual, if it is in the best interests of the cooperative.
"Today's forecast is our best estimate, but given the current volatility it may change over the course of the season. As a result of this volatility, the board has also lowered the dividend forecast for the 2014 financial year to 10 cents per share," says Wilson.
Spierings says Fonterra will maintain our financial discipline and not pay the milk price out of borrowings – particularly in a year when we are forecasting a record payout for our farmers.
Fonterra is required to consider its farmgate milk price every quarter as a condition of the Dairy Industry Restructuring Act (DIRA).
OPINION: There is zero chance that someone who joined Fonterra as a lobbyist, then served as a general manager of Fonterra's nutrient management programme, and sat on the board of Export NZ, a division of lobbyist group Business New Zealand, doesn't understand that local butter (and milk and cheese) prices are set by the international commodity price.
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