Strong demand to keep milk product prices high, says Fonterra

PUBLISHED : Wednesday, 28 May, 2014, 2:54pm
UPDATED : Thursday, 29 May, 2014, 12:48am

New Zealand's Fonterra, the world's largest dairy exporter, signalled that robust demand from China, Latin America and Southeast Asia would keep milk product prices near historical highs in the coming season.

In a country where dairy exports account for a quarter of all exports, high milk prices and solid payouts to dairy farmers have been a boon to economic growth and supported the New Zealand dollar.

Fonterra's payout to its farmer shareholders for the season that winds down this month was finalised at NZ$8.40 (HK$55.70) per kilogram of milk solids - the highest since the dairy cooperative was formed in 2001.

Higher production around the world has pressured global dairy prices in recent months, prompting Fonterra to set its initial forecast for the coming season at NZ$7, but that may be revised upwards in quarterly updates if China's appetite for milk formula and other dairy products grows, as the company expects it to.

"We're still looking at good prices for the milk powders," chief executive Theo Spierings said.

New Zealand's milk powder exports to China doubled to NZ$4 trillion last year, and Spierings said exports could still grow if Fonterra's payout for the coming year was around NZ$8.

"China could bear NZ$8, but if it goes significantly north of NZ$8, that's going to be painful, because then you see a slowdown in demand," he said.

Fonterra's payouts to farmers are based on volatile benchmark global dairy prices set at fortnightly auctions conducted by the cooperative and which have mostly hovered at record highs over the past year.

Under its constitution, Fonterra has only limited leeway in adjusting the payout level. High payouts, however, also crank up input costs and cut into Fonterra's operating margins, prompting the cooperative to warn late last year that its dividend would be slashed to 10 NZ cents per share from 32 NZ cents, while earnings for the year ending in July would fall to about NZ$500 million to NZ$600 million from NZ$1 billion in 2012-2013.

To benefit from higher prices and growing production, Fonterra needs to boost its domestic milk powder processing capabilities, Spierings said.

He said the cooperative is looking to build two additional plants in the country and is looking at acquisition opportunities in Australia.

Fonterra processes roughly 80 per cent of all milk produced in New Zealand but faces growing competition from overseas interests to secure supply there.

France's Danone said this month it will buy a milk powder processing plant in New Zealand, and China's Inner Mongolia Yili Industrial and milk powder maker Yashili International will soon start production at new milk powder processing plants in the country.