Fonterra Payout Forecast Up 87 cents to $6.40kg/MS

Media Release
24 August 2007

Fonterra Payout Forecast Up 87 cents to $6.40 kg/MS

Fonterra Co-operative Group today announced a new payout forecast of $6.40 per kilogram of milksolids for the 2007/08 season, an 87 cent increase on its May forecast of $5.53 kg/MS.

The 87 cent increase is all in the Milk Price component of payout which increases to $6.20, with the Value Return remaining at 20 cents per kg/MS.

Fonterra Chairman, Henry van der Heyden, attributed the rise to the continued strength in commodity prices, particularly recent increases in butter and cheese and ongoing firm prices for milkpowders.

“The strength of the market is such that we have seen the EU reduce subsidies on dairy products to zero for the first time since their introduction more than 30 years ago,” Mr van der Heyden said.

World cheese and butter prices have increased more than 50 per cent over the past few months and milkpowder prices are holding at levels more than double historical long term prices. These price levels were factored into the payout revision.

Mr van der Heyden said the prices achieved since the start of the season in May had more than offset the continued strength in the New Zealand dollar which had at some points traded in the 80 cents US range.

“We have seen huge volatility in the New Zealand dollar which has risen to historic highs and then plummeted recently. While we are using a 71 cent spot rate in our forecasts, we have to acknowledge that rates have not settled and could go either way. If the lower dollar is sustained over time, we could see more upside in payout, but this is not the time to be gambling on that,” he said.

Fonterra CEO Andrew Ferrier said the co-operative was on track with its sales targets for the year and was happy with its position across all of its product groups.

“Powder prices are holding as there has been a consistently tight supply situation. There are some supply gaps out there and with production picking up in our region, we’re ready to fill those gaps.

But we can’t rule out customer sensitivity to prices. The fact is that we are seeing price rises across most food groups at the moment, and the signals are that it will continue for a while,” he said.

Mr Ferrier said Fonterra would continue to focus on holding costs and maximising revenues to retain its competitive advantage and to ensure that as much of the benefits of the strong market and recent currency declines would flow through to farmers.

Fonterra’s Board has reviewed the advance rates for the season and will be lifting them in time for the October payment to farmers. The advance rate for October will increase by 60 cents from $3.60 to $4.20 per kg/MS.

The Board has also announced a change to its forecasting policy reflecting the current volatility in the market. In the past, the Board has advised shareholders whenever the forecast moved by plus or minus 10 cents per kg/MS.

Under the current volatile market conditions the Board has decided that it would be more appropriate to use a 30 cent movement as the trigger for a forecast revision announcement.

ENDS

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