Fonterra increases 2009/10 Milk Price forecast to $6.10 per kgMS

Forecast Distributable Profit range held at 40-50 cents per share; target Dividend range remains at 20-30 cents per share.

Fonterra announced today an increase of 40 cents, to $6.10 per kilogram of milksolids (kgMS), in its forecast Milk Price for the current 2009/10 season.

The Co-operative also maintained its forecast range for the 2009/10 Distributable Profit of 40-50 cents per share. Fonterra’s target dividend range is also unchanged at 20-30 cents per share; this indicates 10-30 cents per share of Distributable Profit would be retained within the Co-operative.
Fonterra Chairman, Sir Henry van der Heyden, said continued strength in global dairy prices, with demand growth beginning to outstrip supply, had driven the Board’s decision to increase the forecast Milk Price. The increase is the first since the forecast Milk Price was raised by $1.10 last November.

“This extra 40 cents per kgMS will be welcomed by our farmer shareholders and also confirms that 2009/10 is shaping up as the second best in terms of cash payments to Fonterra farmer shareholders,” Sir Henry said.

“However, it comes at a time when many farmers, especially those north of Taupo, are suffering from worsening drought conditions. Many of them are being forced to dry off their herds early this season, so unfortunately what they will gain in farm income through the higher Milk Price they may lose through lower production.

“Looking forward, we recognise that the weather has made it very difficult for many farmers going into the winter, and that farmers will need to be setting their budgets soon for next year.

“Although a more formal forecast will be done at the end of May, our view is that farmers should budget for a Milk Price around this year’s level.”

In light of the higher Milk Price forecast, Fonterra has revised the advance rate schedule for milk payments, with progressive increases in payments over the next six months. Sir Henry said this would put more money into farmers’ pockets sooner – helping farmers with their cash flows while protecting the strength of Fonterra’s balance sheet.

Fonterra CEO, Andrew Ferrier, said that, since the last Milk Price forecast, dairy prices had remained relatively high and more stable than expected for several months, and had recently increased further.

“The global supply/demand balance for dairy products has shifted to a slight supply deficit. Demand from Middle East/North Africa and Asian markets continues to grow. On the supply side, global milk production has continued to slow, with production contracting in several key markets. For instance, supply has been affected by a tough winter in Europe, while North America and Australia production is also down. In New Zealand, the effects of drought mean Fonterra’s production is now projected to be similar to last season, compared to the modest increase that we forecast at the beginning of the season,” Mr Ferrier said.

Although the net effect was good news for the Milk Price in the short term, Mr Ferrier cautioned that the market continues to show significant volatility.


Distributable Profit
Mr Ferrier said the higher dairy prices were impacting on Fonterra’s earnings, but the Co-operative was still holding its forecast range for the Distributable Profit for the year ended 31 July 2010 at 40-50 cents per share, as announced.

Mr Ferrier said that despite the higher Milk Price, profits remain as expected, driven primarily by further earnings improvements within the consumer brands businesses and lower overall funding costs.

“The recent significant rises in global dairy prices are naturally putting some pressure on profits, particularly in the Ingredients business. Under Fonterra’s Milk Price, Fonterra’s profit remains vulnerable to periods when returns for non-powder prices (such as cheese and casein) lag the returns for milk powders. With the very recent 21% step up in powder prices on gDT, Fonterra anticipates that margins earned on non-powder products will lag the higher returns of powders, putting some pressure on profits,” Mr Ferrier said.

“However, our consumer businesses are having another very strong year and are achieving good increases in underlying earnings. This, together with lower funding costs, are the primary contributors in allowing us to hold our forecast range of distributable profits,” he commented.

- ENDS -

Note: Changes to Key Financial Terms
The capital structure changes approved at November’s Annual Meeting mean some changes to the terms used by Fonterra to describe farmer payments:
Milk Price: the price paid to farmer shareholders for milk supplied to Fonterra, on a cents per kgMS basis.
Distributable Profit: the total profit from Fonterra’s business activities available for distribution to farmer shareholders by way of a dividend, on a cents per share basis.
Dividend: the amount of Distributable Profit actually paid to farmer shareholders in respect of any financial year, expressed on a cents per share basis.
Retentions: the amount of Distributable Profit that is not paid to farmer shareholders and is retained within Fonterra’s balance sheet.
Value Return was previously used to describe the amount of Distributable Profit paid out to farmer shareholders, on a cents per kgMS basis. This term is no longer relevant as profit is now being distributed via dividend payments. Similarly, Payout is no longer a relevant term because farmer shareholders can now hold both supply-backed and dry shares.