Fonterra chief executive Theo Spierings says commodity markets are overreacting to a world glut of milk and he does not foresee any further erosion of this season’s payout forecast â€“ despite the economic chill from the northern hemisphere.
Spierings is also optimistic Fonterra can stick to its new season opening forecast of $5.95 to $6.05 announced yesterday.
Fonterra, New Zealand’s biggest company, yesterday announced a 30-cent cut in its milk price forecast for the current 2011-2012 season, in response to a continuing softening in international dairy commodity prices.
The reduction took the expected milk price to $6.05 a kilogram of milksolids, though the forecast net-profit-after-tax range of 40c to 50c a share was unchanged.
The forecast payout range for this season before retentions is now $6.45 to $6.55.
Yesterday’s cut will mean around $500 million less for the New Zealand economy this year if it becomes the final payout for 2012, and means the average production farmer will be $42,000 worse off than expected.
The cut is the fourth change to the payout forecast this season, the rollercoaster ride a symptom of the volatile world economy.
On the bright side, Fonterra’s opening forecast for the new season beginning on June 1 was better than economists expected, given global economic pressures.
Fonterra directors left the fair-value share price unchanged at $4.52 for next season.
Spierings said he believed the 20.3 per cent decline in the Global Dairy Trade (GDT) trade-weighted index since Fonterra’s last forecast of $6.35 in April was a «bit of an overreaction to oversupply». GDT is Fonterra’s twice-monthly internet auction platform, considered a barometer of world prices.
Fonterra farmers’ production was up 10.6 per cent on last season.
«I think we have had quite a drastic correction of prices … People have underestimated how long the oversupply would continue. Demand is still very strong, but supply is even stronger.
«But I don’t see any reason why things will get any lower than where they are now at $6.05 and I am also optimistic about the opening forecast because demand is good, inventory levels in the world are not very high and there is not much [market] intervention [by governments] in Europe and the US.»
The oversupply issue would correct itself, and demand would remain strong, Spierings said.
ANZ Bank chief economist Cameron Bagrie echoed his interpretation, saying the payout cut was more a reflection of supply rather than the start of chilly economic winds from the financial turmoil overseas. «The demand story still looks good â€“ 12 months ago prices were remarkably high which was a big signal for other milk producers to crank up production, and it has, and lo and behold prices have come off.
«The reality is that the dairy payout is not going to be $7 every year. We have to get used to an environment where there is a hell of a lot of volatility.»
The likely $500m loss to the economy this year was «more of a niggle factor» as it was only 0.2 per cent of gross domestic product.
«The dairy payout is symptomatic, in part, of what is going on in Europe, but it is more strongly symptomatic of what we have seen in the supply side in the last 12 months.»
Federated Farmers dairy president Willy Leferink said the lower payout this season was unwanted, but farmers had repaid a lot of debt in the past few years.
A good growing season had helped add 6 to 8 per cent more milk for farmers, which could counterbalance the latest cut.
Leferink said farmers would approach next season cautiously after Fonterra announcements.
It would depend on farmers’ costs whether they could live on a $5.50/kg milk price next season.
«This is a starting point, but farmers should be prudent with their spending this winter and make sure they can produce well at $5.50/kg without skipping the necessities.»
– Â© Fairfax NZ News