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UPDATE: Fonterra Shareholders' Council relieved at dairy forecast being maintained

26 Feb 15

Farmers will be relieved at today's decision by Fonterra Cooperative Group, the world's largest dairy exporter, to maintain its forecast payout to farmer shareholders for the current season at $4.70 per kilogram of milk solids, says Fonterra Shareholders' Council chairman Ian Brown.

The Auckland-based company held the forecast steady and maintained guidance for a dividend range of between 25 cents and 35 cents per share. It compares with a record $8.40/kgMS milk price last season plus a 10 cents per share dividend.

Prices for whole milk powder, the nation's key export product, have gained 45 percent at Fonterra's GlobalDairyTrade auctions since December after plunging last year, but the turnaround has been based on lower supply rather than increased demand and didn't warrant an increase in the forecast, the company said.

Brown said on-farm conditions have been really tough nationwide though farmers are pleased to see a reversal in the downward trend for dairy prices.

"It has been encouraging to see GlobalDairyTrade and, in particular, whole milk powder prices, increase significantly recently and given what took place late last year, it will go some way to building confidence on farm."

WMP prices rose 13.7 per cent in the latest GDT auction to $US3,272 per tonne but US$3500 per tonne is what is required in the second quarter to maintain the forecast said Fonterra chief financial officer Lukas Paravacini.

"We're getting very close and we'll see in the next few GDTs how strong that turnaround in sentiment is going to be but we are well into the season and a lot of our milk is already contracted," he said.

Fonterra will provide a full business update when it reports first-half earnings on March 25.

Brown said farmers will be watching what happens with the forecast at the interim results and will want to see the strategy, which is key to adding value long term, deliver a return relative to the significant investment they have made and continue to make in the cooperative.

"In the interim, as always, the council urges farmers to be prudent in their financial planning to ensure they place their businesses in the best possible shape for next season."

The turnaround in global dairy prices is likely to have more impact on next season's opening forecast in May than this season's but Fonterra doesn't provide an outlook on that figure at this stage.

Milk production from Fonterra's 10,600 suppliers is likely to be 3.3 percent down this season due to the impact of the drought.

Paravacini said although production for the year was still 1.7 per cent above last year, the cooperative still sees the 3.3 percent drop as the likely outcome for the season.

Fonterra tracks production daily and Paravacini said it was currently 5 percent below the level at this time last year due to the drought and farmers not bothering with supplementary feed because of the low payout price.

The uplift in global dairy prices was due to lower supply rather than increased demand, he said.

"That's another reason confidence in the milk price is still fragile," he said.

Supply from New Zealand is down and the US was also having problems supplying because of industrial action which has closed ports on the west coast and there had also been some reduction out of Europe. On the demand side, China is still not back to the levels it had been and the Russian ban on imports has not been lifted.

Westpac senior economist Michael Gordon said there were two more GDT auctions before Fonterra releases its first-half results and the bank's forecast of a $5.00/kg farmgate milk price for the end of the season relies on further modest price increases at these.

"We're reasonably confident that this will happen, as drought conditions in New Zealand put a squeeze on the global milk supply."

Units of the Fonterra Shareholders' Fund, which holds 7.5 percent of the cooperative, are trading up 1 cents today to $5.99, and have slipped 0.3 percent this year. Some investors have been critical of both last year's 10 cent dividend and this year's forecast range.

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