Fonterra slashes forecast FGMP again as volatility continues

10-Dec-2014 - Last updated on 10-Dec-2014 at 13:55 GMT

Fonterra has slashed its farm gate milk price (FGMP) forecast for the 2014/15 season to NZ$4.70 (US$3.63, €2.93) - the third such reduction since it was first announced in May.

New Zealand-based Fonterra announced earlier today it had reduced its FGMP forecast for the 2014/15 season, which began on June 1, from NZ$5.30 (US$4.09, €3.30) per kg of milk solids (kgMS) to NZ$4.70.

With a current estimated dividend range of between NZ$0.25 (US$0.19, €0.16) and NZ$0.35 (US$0.27, €0.16) per share, Fonterra's forecast cash payout to suppliers stands at between NZ$4.95 (US$3.82, €3.08) and NZ$5.05 (US$3.90, €3.15).

Under the Dairy Industry Restructuring Act (DIRA) - legislation that allowed for the formation of Fonterra in 2001 - Fonterra is required to consider its FGMP forecast each quarter.

In May 2014, Fonterra announced an opening forecast FGMP of NZ$7.00 (US$5.40, €4.36) for the 2014/15 season. Two months later, in July, Fonterra knocked a dollar off its forecast.

Then in September, citing "continuing volatility", Fonterra slashed its already revised FGMP forecast from NZ$6.00 (US$4.63, €3.74) to NZ$5.30.

Based on its 1.616bn kgMS milk supply forecast for the 2014/15 season, the reductions represent a collective drop in FGMP payments to suppliers of around NZ$3.72bn (US$2.87bn, €2.32bn).

"Considerable volatility"

In a statement announcing today's FGMP reduction, John Wilson, chairman, Fonterra, said a lower forecast was expected by its suppliers.

"There is still considerable volatility in global dairy markets," he said.

"Right now we are seeing a number of factors that are delaying a sustained return to higher global prices."

"Falling oil prices, geopolitical uncertainty in Russia ad Ukraine, and subdued demand from China as it continues to work through inventory are all contributing to ongoing volatility and weak demand," he added.

Given the current uncertainty, Fonterra has advised its farmer owners "to continue to be cautious with budgeting."

To support their budgeting efforts, Fonterra is "undertaking a targeted programme to generate more cash," said CEO, Theo Spierings.

"This is a clear signal to farmers that we are all in this together," said Spierings. "We are tightening our belts, just as they are."