21 November 2008 - Fonterra Co-operative Group has announced a revised forecast payout for the 2008/09 season of $6.00 per kilogram of milksolids. This is a 60 cent reduction in the previous forecast in September and it follows a 24 percent drop in international dairy commodity prices in the last eight weeks.
Fonterra Chairman, Henry van der Heyden said declining prices across all commodities, including dairy, had been exacerbated in recent weeks by the global financial crisis.
“There is a great deal of uncertainty around the world, industry and trade activity is slowing down and all the forecasts are pointing to a global recession. We have seen a real tightening in consumer spending and dairy is not immune to this rapid deterioration in the global economy.”
“We have kept conditions under close review and brought forward our forecast revision so farmers know exactly where they stand as they work through their budgets for next year. The message is for farmers to be cautious in their planning.”
Fonterra CEO Andrew Ferrier said, given current conditions, demand was unlikely to recover by mid-2009 as initially expected.
“While the medium to long term outlook for dairy remains positive the financial crisis has driven commodity prices down further and, with consumer confidence deteriorating, it is likely that prices will remain weak, rather than recover, through our fiscal year.”
Mr Ferrier said that as the world economy retreated, commodity stocks were building and these would need to be cleared before prices improved.
“The market has not yet absorbed the surplus stocks from the US. In addition, stocks in the EU are building. This combination of excess stocks and weak demand has driven prices down rapidly. A rebalancing of the market is unlikely in the short term,” he said.
The $6.00 per kgMS forecast comprises a Milk Price of $5.60 per kgMS, down 65 cents, and a Value Return forecast of 40 cents per kgMS, a five cent increase.
“While lower commodity prices will improve margins in some markets for our consumer brands businesses, we expect this to be offset by lower volumes as a result of lower consumer demand.
“The forecast improvement in Value Return is the result of potential improvements in the Ingredients business due to lower commodity prices,” Mr Ferrier said.
Mr Ferrier said that while no agreement had been finalised around the sale of San Lu’s assets, it seems more likely that the proceeds of these assets will go to San Lu’s liabilities. As a result, it is increasingly likely that Fonterra will have to write off the balance of its investment and this had been taken into account in the latest payout forecast.