It said on Thursday it would lower the volume on offer by a further 7 per cent, adding to its recent cut. In total this season it will offer 33 per cent less milk than last season.
A Fonterra spokesman said this equated to 1.3 billion litres of milk.
The co-operative’s forecast offer volumes over the next 12 months for New Zealand products have been decreased by a further 56,045 tonnes with a 62,930 tonne drop occurring over the next three months and 6885 tonnes of planned volumes being added back later in the year «in anticipation of changing market conditions».
There were calls last week by NZ First leader Winston Peters and some farming leaders to completely suspend trading on the GDT.
Standard & Poor’s said in its announcement that the decision reflected weakening global dairy market conditions and Fonterra’s high debt. Global dairy prices have plunged this year, falling by about half.
Being placed on credit watch means Fonterra will be closely watched but does not necessarily mean its credit rating would be cut. But a lower credit rating typically means a greater risk and so higher interest rates.
Federated Farmers dairy president Andrew Hoggard said farmers wanted Fonterra to be recorded as strong as possible but «it’s probably symptomatic of where we are at the moment».
Standard & Poor’s Ratings Services said it has placed its ‘A’ long-term and ‘A-1’ short-term ratings on Fonterra and its associated debt issues, on «Credit Watch» with negative implications.
S&P said it could affirm the current rating but if it did cut Fonterra’s rating that would not be more than «one notch» down.
«The Credit Watch placement reflects our concerns regarding potential weakness in Fonterra’s key financial metrics given its high debt levels at a low point in the global price cycle. This follows Fonterra’s announcement of a lower forecast milk price due to weak demand and surplus supply in the global dairy market,» said Standard & Poor’s credit analyst Brenda Wardlaw.
Chief Financial Officer Lukas Paravicini said Fonterra had continued to exercise financial «prudence and discipline in challenging times for dairy globally» and was taking steps to stay financially strong.
Fonterra would slash capital spending for the next two years and would spend $500m to $600m less for the 2016 financial year, compared with 2015.
Fonterra also set a «prudent» advance rate payment to our farmers for the current season given ongoing volatility of global dairy prices.
Last week, Fonterra slashed the forecast payout to farmers to $3.85 a kg from an earlier forecast of $5.25.
Fonterra was also «progressing well with our business transformation that will deliver significant one-off and recurring savings for the business,» he said.
«These measures reinforce our sound financial position and are enabling us to provide support to our farmers during this difficult period of low global dairy prices.»
The co-operative’s current debt levels were in line with expectations and followed investments in New Zealand processing capacity, higher advance rates to farmers last season and planned investments in Fonterra’s number one strategic market, China.
«While current global prices are unsustainably low, we take a longer term view of the cyclical nature of the international dairy market and have confidence in the fundamentals for dairy,» said Paravicini.
S&P said high debt levels reflecting the sizable acquisition of a shareholding in China-based Beingmate, combined with peak capital expenditure, at this low point in the dairy price cycle will place Fonterra’s key credit metrics under pressure in the short term.
In March Fonterra completed the purchase of a 19 per cent stake in Chinese baby-milk maker Beingmate, at a cost of about $750m.
Beingmate’s shares have fallen about 13 per cent since the middle of March, implying a paper loss of about $100m.
Fonterra announced plans last August to buy up to 20 per cent of Beingmate as part of a deal to sell New Zealand milk products into China.
Hoggard said there had been a lot of supposition about the purchase and «based on past history» there was concern over its involvement.
«It’s not a great look, it makes me nervous but the proof will be in the pudding,» he said.
Products had yet to come out of the Darnum plant in Victoria, Australia but once they came on line would be the time to judge if it was a good investment or not, Hoggard said.
Source: Stuff