Fonterra, the world’s largest dairy exporter, has forecast that its payout for farmers could slide in 2011/12 after a “record” 12 months in the current financial year.
The New Zealand dairy giant yesterday (24 May) predicted that its payout for the year starting on 1 June would be lower than the current year, when it expects to pay NZ$8.00-8.10 before retentions.
The forecast for the current year – when Fonterra expects to see record production – comprises a milk price of NZ$7.50 per kilogram of milk solids and distributable profit of NZ$690-830m – or NZ$0.50 to NZ$0.60 a share. In Fonterra’s 2010 financial year, it made a distributable profit of NZ$800m.
The current year’s forecast has been increased by NZ$0.10 since Fonterra’s previous forecast in February. The final payout will be confirmed when Fonterra publishes its annual results in September.
Next year, Fonterra has set an opening forecast payout of NZ$7.15-7.25, which includes a milk price of NZ$6.75 per kilogram of milk solids and a forecast “distributable profit” range of NZ$0.40-0.50 a share.
Chairman Sir Henry van der Heyden said the forecast for the 2011/12 financial year reflected the company’s “realistic” outlook towards global dairy markets.
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By GlobalData“In the current season, farmers have benefited from sharply higher commodity prices due to improved world demand for dairy products. Commodity prices have been close to record levels. Although current market prices and exchange rates would still yield a milk price similar to this season’s, recent months have been characterised by a softening in commodity prices and continued strength in the New Zealand dollar. As commodities are mostly sold in US dollars, a higher exchange rate hits the milk price,” van der Heyden said.
“We must also be aware of the potential effect that current high commodity prices may have on dairy market dynamics, as high prices tend to encourage more supply into global markets from a number of countries.”
The company’s distributable profit forecast for 2011/12 was NZ$570-710m, which reflected a “slight increase in expected underlying business profitability compared with 2011”, the group said.
In the current financial year, Fonterra said in February that margins from its ingredients business had been squeezed by higher milk costs. The increase in commodity prices also had an impact on Fonterra’s consumer unit.
CEO Andrew Ferrier said there had been some progress since February but its consumer division had faced “earnings pressure”.
“Since February, our ingredients businesses have recovered some lost ground in terms of operating earnings, as commodity prices have levelled off and our ability to make profits above raw milk costs for other dairy product streams has improved,” Ferrier explained. “On the downside, our consumer business in Australia and New Zealand has faced earnings pressure as we predicted earlier. This business is partially absorbing higher dairy ingredients costs due to intense market competition and because of initiatives such as our decision to freeze the price of liquid milk sold to retailers in New Zealand.”
Ferrier said that, in spite of very strong global commodity prices, operating earnings within Fonterra’s commodities and ingredients unit and its consumer brands arm in total were expected to be marginally ahead of 2010.