Fonterra flagged faith in a revival in dairy prices “later this year”, even as it acknowledged the “unprecedented pressure” on farmers from the weak prices, which is to prompt an acceleration in dividend payouts.
The New Zealand-based group, the world’s drop milk exporter, acknowledged an “imbalance” between buoyant dairy supply and soft Chinese import demand which had “brought prices down to unsustainable levels for farmers around the world”.
“The balance between available dairy exports and imports has been unfavourable for 18 months following European production increasing more than expected and lower imports into China and Russia,” said Theo Spierings, the Fonterra chief executive.
He added that the downbeat market conditions, which saw prices at Fonterra’s latest GlobalDairyTrade auction fall to an eight-month low were “likely to continue in the short term”.
EU slowdown
However, dairy prices were “expected to lift later this calendar year”, Mr Spierings said, taking a more upbeat attitude than some other commentators, including Stan McCarthy, head of Ireland’s Kerry Group who said last month that he was “surprised that anybody is talking about a pick-up in dairy prices in 2016″.
Mr Spierings said that a price revival would be helped by a “build” in China’s imports “in line with overall consumption growth”, with the country’s whole milk powder imports expected to “grow steadily” at 4-5% a year.
Meanwhile, growth in European Union milk output will slow after a boost from the removal of production quotas a year ago, prompting “more than 1bn litres of additional milk”.
EU milk output growth will “revert to normal growth” of about 1% a year, Fonterra said.
The European Commission itself has forecast EU milk output growth slowing to 1.4% this year, from 2.3% in 2015, with a further deceleration to 0.7% expansion in 2017.
‘Strong long-term fundamentals’
And the co-operative said it was upbeat over prospects further ahead, saying that the global dairy market had “strong long-term fundamentals”.
The world market will expand by 2.3% a year to 465bn litres in 2020, from 406bn litres in 2014, backed by factors including increasing populations, economic growth in Africa, the growing middle class in Asia and the opening up of Iran.
The traded market will grow even faster, by 5.5% a year, taking it to 91bn litres in 2020 compared with 66bn litres in 2014.
Early payout
The comments came as the group unveiled a 123% jump to NZ$409m ($275m) in earnings for the August-to-January half, reflecting the boost to margins from lower milk costs.
The group expects to pay its farmer members NZ$3.90 per kilogramme of milk solids for milk in 2015-16, down from NZ$4.40 per kilogramme of milk solids last season.
While revenues dropped by 9% to NZ$8.8bn, a reflection of weaker dairy values, underlying operating profits soared 77% to NZ$665m, with lower finance costs also contributing to the surge in after-tax earnings.
Fonterra doubled to NZ$0.20 per share its interim dividend, to be paid in April, with further payouts of NZS$0.10 per share to be made in May and August, earlier than typically issued, “to help support farmers at a time when cash flows are extremely tight”.
The co-operative added that the “timing of these payments is a specific response to the current, very challenging, financial conditions farmers are facing and does not signal any intention to move away from Fonterra’s normal practice of twice-yearly dividends paid in April and October”.
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