Fonterra likely to hike milk payment to NZ farmers as prices improve, OMF says
By Tina Morrison
Feb. 20 (BusinessDesk) - Fonterra Cooperative Group may lift its farmgate milk price payout to farmers this season
following increases in Global Dairy Trade auction prices, according to brokerage OMF.
New Zealand's dominant milk processor has said it expects to pay its farmer suppliers $6.40 per kilogram of milk solids
for the 2017/18 season, however OMF said in its monthly New Zealand Dairy Report published today that strengthening
dairy prices have pushed up the expected payout in its modelling to $6.78/kgMS.
"Based on season-to-date GDT prices and assuming that prices remain unchanged through to May, our milk price model
points to a payout of $6.78/kgMS," OMF said in the report. "Fonterra has around 22 percent of product left to sell over
this period, and we estimate that Fonterra’s current guidance would be consistent with prices falling 18 percent on
average (which would be highly unlikely). We look for Fonterra to announce a conservative 25 cent increase in the milk
price."
OMF said hiking its milk payout to farmers would allow the farmer-owned cooperative to recognise losses and impairments
relating to its investment in Chinese infant formula producer Beingmate Baby & Child Food, without harming farmer incomes.
"We believe Fonterra is likely to partially write-down its 18.8 percent stake in Beingmate, reflecting the downward
revision in its earnings forecast to CNY800-1,000 million (NZ$174-217 million) and the latest downturn in its share
price," OMF said. "In particular, Beingmate’s poor performance has a direct impact on Fonterra’s profitability –
Fonterra’s share of Beingmate’s net loss was reported at NZ$42 million in FY2017 – and we expect losses this year to
weigh on Fonterra’s earnings and dividend payments."
OMF noted recent rainfall in New Zealand had improved pasture growth and suggested the country's milk production may not
be hurt by dry conditions as much as Fonterra expected. It expects prices to be flat in tonight's auction after three
successive gains.
In late December, Fonterra said it expects its New Zealand milk collection to fall 3 percent to 1,480 million kgMS this
season from 1,525 million kgMS last season as dry weather stunted grass growth.
"In order to achieve this level of output, Fonterra is implicitly assuming that milk collections will be 6.5 percent
lower between January-May compared to the previous season," OMF said. "We maintain our view that while risks to
production remain, we are more sanguine as current weather conditions and outlook appear supportive and we see scope for
production in coming months to be more or less in line with the previous season, bringing total collections to 1,520
million kgMS for 2017/18.
"As we believe that the latest rebound in dairy prices can be at least partly attributed to concerns around New Zealand
production, should upcoming production statistics surprise on the upside, pricing support could dissipate and we may
observe a correction," OMF said.
The brokerage noted that global dairy production remained in expansion, led by Europe.
"We continue to see downward pressure on prices, particularly for cheese and butter, although we are wary that this view
has been largely priced in," OMF said.
For the 2018/19 season, OMF said its model suggests a Fonterra milk payout of $6.94/kgMS, ahead of the NZX Milk Futures
price of $6.01/kgMS.
"This suggests that there is considerable upside risk to market expectations although we acknowledge that downward
pressures remain," OMF said.
Auckland-based Fonterra is the world's largest milk processor and the biggest exporter of dairy products.
(BusinessDesk)
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