10 Dec 2014

Farmers will feel Fonterra cuts next winter

11:28 am on 10 December 2014

Fonterra has dropped its forecast farmgate milk price to $4.70 a kilo of milk solids.

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Photo: AFP

Today's drop is the third since the opening forecast and follows a continuing slide in average dairy prices in the global dairy trade auction, which have almost halved since early February.

Federated Farmers' chairman Andrew Hoggard said it would be midway through next year before farmers felt the impact of Fonterra's reduced payout.

Mr Hoggard told Radio New Zealand farmers were still getting progress payments from the 2013-2014 season at a much higher rate of milk solids per kilo.

Fonterra said global milk supply was greater than demand, reducing the whole milk powder prices on which its farmgate milk payout is based.

The key price fell 7.1 percent to $US2200 in the latest auction early this month.

Fonterra chairman John Wilson said a turnaround in the global prices was expected by winter next year - later than the company had been predicting.

Fonterra's payout forecast for the 2014/15 season, announced in June, began at $7 per kilo of milk solids, but steadily dropped to $6 then $5.30 - a level that bank economists and market analysts said was still unsustainable.

Last season farmers had a record $8.40 milk payout. The new forecast is the lowest since the 2006/7 season, when Fonterra paid farmers $4.46 a kilo for their milk.

Fonterra's Hautapu dairy factory, near Cambridge.

Fonterra's Hautapu dairy factory, near Cambridge. Photo: AFP

The dairy company is maintaining its dividend range of 25-35 cents a share, which would give farmers a total cash payment for the season of $4.95 - $5.05.

It said its revised farmgate milk price assumed whole milk powder prices would rise to about US$3500 towards the end of this season.

Chief financial officer Lukas Paravicini said the company was watching market conditions closely and would revise its forecast again if necessary.

He said Fonterra was confident demand would increase in China and prices would improve this season.

The New Zealand dollar began falling immediately following this morning's announcement.

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