Fonterra Co-Operative Group Ltd. FCG.NZ +0.67% on Tuesday lowered its forecast for payouts to farmers amid declines in global dairy prices, a move that sent the New Zealand dollar tumbling.
Fonterra forecast it will pay its 10,500 farmer shareholders six New Zealand dollars (US$5.11) per kilogram of milk solids in the current season, which began June 1, meaning that total farmer income will be about NZ$4 billion lower than in the prior season.
“Today’s announcement from Fonterra was lower than most in the market were expecting, and will come as a shock to farmers,” said Westpac Chief Economist Dominick Stephens.
The New Zealand dollar fell on the news, sliding to US$0.8512 late in the session versus US$0.8546 before the announcement. Any move in the payout tends to have a significant impact on the New Zealand dollar as dairy forms the backbone of the economy, representing around 25% of exports. The bulk of these exports come from Fonterra, which produces about a third of the world’s traded dairy products.
Fonterra has previously forecast it would pay NZ$7 per kilogram of milk solids—already sharply lower than the prior season’s forecast of NZ$8.40. On Tuesday, however, Fonterra Chairman John Wilson said the current forecast reflected continuing volatility, with global dairy prices down 16% since the start of the season on June 1.
“We have seen strong production globally, a buildup of inventory in China, and falling demand in some emerging markets in response to high dairy commodity prices. In addition, the New Zealand dollar has remained strong,” he said. The New Zealand dollar has come off the 30-year peak it touched in early July but remains a significant headwind for exporters, making it harder for them to compete globally.
Fonterra Chief Executive Theo Spierings said he is expecting dairy prices to recovery but said “it is too early to predict how strong this recovery will be more when it will kick in.”
Source: Wall Street Journal
