N.Z. Farmers Face Income Drop as Fonterra Cuts Milk Forecast

The world’s biggest dairy exporter foresees lower earnings next year as global milk supply increases.

Matthew Brockett

May 28 (Bloomberg) -- New Zealand dairy farmers face lower earnings from their milk next year as global supply increases and prices fall.

Fonterra Cooperative Group Ltd, the world’s biggest dairy exporter, today forecast a farmgate milkprice of NZ$7 ($6) a kilogram for the season ending May 2015 and cut its estimated payout for the current season by 25 cents to NZ$8.40. Bank of New Zealand economists had predicted a 2014-15 price of between NZ$6.50 and NZ$7.50 a kilogram.

"There is currently more milk available for the international market to absorb," Fonterra Chief Executive Officer Theo Spierings said in a statement. "We expect demand from China to remain strong. In Russia, there will be pressure on the balance between imports and local production. These factors are expected to continue influencing the supply-demand balance."

Booming dairy exports are fueling economic growth in New Zealand, where the central bank became the first in the developed world to start raising interest rates this year. Lower returns for Fonterra’s 10,000 farmer shareholders may prompt them to reduce spending.

Economic Growth

"On the face of it, the decline in the payout between years is a drag on the economy over the coming year, but that dynamic is exaggerated," Con Williams, rural economist at ANZ Bank New Zealand Ltd. in Wellington, said in a note to clients. "The coming year’s payout will still be the fourth highest on record, and from a spending point of view farmers will be in a similar cash-flow situation."

The New Zealand dollar rose after the announcement. It bought 85.62 U.S. cents at 12:05 p.m. in Wellington from 85.40 cents immediately ahead of the statement. The currency has remained firm despite a 23 percent drop in whole milk powder prices since Feb. 5.
The economy will expand 3.5 percent this year, according to the New Zealand Institute of Economic Research.

Milk supply will increase 2 percent in the coming season, Fonterra predicted. It maintained its dividend of 10 cents for the current season and said a dividend for the coming year will be published in July.

Shares in the Fonterra Shareholders’ Fund, a publicly traded trust that tracks the cooperative’s dividend payout and earnings, were unchanged at NZ$6 at 12:05 p.m. in Wellington after earlier rising as high as NZ$6.03.