Fonterra still believes that global milk production will be reduced, leading to higher international prices next year

Fonterra is maintaining its forecast Farmgate Milk Price of $4.60 per kgMS, saying it still believes there will be reductions in production globally and that this will help to boost international prices next year.

The dairy co-operative recently announced an estimated earnings per share range of 45-55 cents, which, along with the $4.60 price, would give a "total available" for payout of $5.05-$5.15 kgMS. Out of this Fonterra's currently forecasting a cash payout of $4.95-$5.00 .

Economists have said that global prices will need to improve from where they are for Fonterra to make the $4.60 milk price.

And Fonterra chairman John Wilson is reiterating that the co-operative still thinks its forecast improvement in global prices will occur.

“We are looking out over the next nine months and basing our forecast on the view that current, unsustainably low prices will continue to impact production levels globally. We support the consensus view in the market that an improvement will take place, but the market remains volatile. While there are signs of a recovery, particularly in China, we still need the imbalance between supply and demand to correct.

“That imbalance is starting to reduce with year to date production in the United States up by only one per cent and slowing, and New Zealand volumes expected to be down by at least six per cent over the current season. In the EU, however, farmers are continuing to push production, currently up one per cent.”

Given the outlook Fonterra’s board decided not to continue the Fonterra Co-operative Support loan beyond the end of this calendar year. The loan was made available on production from June 1 to December 31. The loan of 50 cents per kgMS is interest-free until 31 May 2017 with repayments triggered when the Farmgate Milk Price exceeds $6 per kgMS.

Wilson said the board’s scheduled review had weighed up the improved Farmgate Milk Price and higher Earnings Per Share forecast since the loan was launched, when the milk price was at $3.85, and the need for financial discipline from the Co-operative. The board had decided not to continue the Co-operative Support loan for milk collected after 31 December, but will monitor conditions and assess the need to continue the support if market conditions changed later in the season.

“We will provide some $390 million in support to around 75 per cent of our farmers through the most productive half of the season, including the peak. Farms typically produce 60 per cent of their milk in the first half, with production beginning to taper off from December, so we have provided support when it is needed the most.”