WELLINGTON: New Zealand dairy exporter Fonterra slashed its milk payout forecast to a six-year low on Wednesday as global dairy prices tumble, and said a Russian ban on dairy imports would keep global prices volatile in the coming months.
The co-operative cut the price it pays its farmer shareholders for milk to NZ$5.30 ($4.26) per kg of milk solids from a previous forecast of NZ$6.00, as expected by economists.
The forecast was the lowest since the 2008/09 season.
Russia's ban, imposed in retaliation for global sanctions over the conflict in Ukraine, is raising supply as European countries divert sales from one of the world's largest cheese importers.
The United States and euro zone countries are also ramping up supply as they chase the hefty premiums commanded by imported infant formula in China, where demand has soared as a growing middle class acquires a taste for milk, cheese and yoghurt.
"It's a very volatile environment at the moment," Fonterra CEO Theo Spierings told reporters.
"It's a very strong picture on the supply side but there are issues on the demand side."
The downgraded forecast from NZ$6.00 reflects a 44 percent tumble in global dairy prices so far this year due to higher supply and pent-up inventories in China, and represents a sharp fall from a record-high payout of NZ$8.40 for the year ended July.
Such a payout would knock NZ$5.4 billion from farmer incomes from the previous season and lower nominal growth in the $180 billion New Zealand economy by about 2 percent.
New Zealand is the world's largest dairy exporting nation.
Spierings said the payout forecast was based on expectations that the global price of whole milk powder would recover to around $3,500 per kilogram, from around $2,700 at the moment, but some economists believe that could be optimistic.
"Dairy prices haven't really settled after the Russian import ban in the last month or so, so there's still some downside risk," ASB bank rural economist Nathan Penny said.
FORMULA PLANS
As the company makes headway in China's lucrative yet extremely competitive branded infant formula market, Spierings said there were no plans to put Fonterra's Anmum milk formula brand on supermarket shelves in China's largest cities.
"I don't want to pay massive amounts of listing fees in tier-1 cities get product on (supermarket) shelves," Spierings told Reuters, referring to China's largest cities including Beijing and Shanghai.
"We would go up against the big multinationals and I'm not willing to do that," he said, adding that Fonterra was planning to sell formula in Beijing through online sites and baby shops.
Supermarket sales in smaller cities were under consideration, however, following the company's tie-up with Chinese baby food and formula maker Beingmate Baby and Child Food Co Ltd, which has strong distribution networks.
The partnership is Fonterra's first in China since 2008 when Sanlu, its then-partner in China, added a toxic industrial chemical called melamine to bulk up its infant formulas.
Six children died and thousands fell ill.
Fonterra is building its branded presence in China a year after a product recall there and in other Asian countries resulted in a ban on some of its ingredient products and a NZ$30 million hit from contractual penalties.
Those costs contributed to a 76 percent tumble in net profit to NZ$179 million for the year ended July.
Normalised earnings before interest and tax fell 50 percent to NZ$503 million, as margins took a hit from high input costs and the company struggled to churn out profitable products like whole milk powder in a strong production season.
Fonterra expects margins from its consumer and food service businesses to pick up from the second quarter, as it pays less for raw milk while it improves its product stream to process higher-returning products.
It raised its full-year dividend forecast to 25 to 35 NZ cents per share from 10 cents per share for the year just ended.
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