FONTERRA today slashed its payout forecast for this season to 14 per cent lower than its original estimates after international dairy commodity prices slumped 24 per cent in the past eight weeks.

The new forecast, NZ$6/kg milksolids, is a NZ$0.60/kg reduction on its revised NZ$6.60 forecast in September, when it trimmed the original $7 projection.

Last season, Fonterra gave farmers their highest payout payment in 43 years.

In inflation-adjusted terms it paid a record NZ$7.90/kg, which added up to NZ$9.3 billion for its 10,724 farmers -- the equivalent of an average NZ$867,213 for each of them.

Fonterra chairman, Henry van der Heyden said today the record prices of last season were already declining when their slump was exacerbated by the global financial crisis.

"Industry and trade activity is slowing down and all the forecasts are pointing to a global recession," he said.
Dairy foods were not immune to the "real tightening" in consumer spending.

Fonterra was due to announce its next forecast review in December, but brought it forward so farmers would know exactly where they stand in budgeting.

"The message is for farmers to be cautious in their planning," he said.

Fonterra chief executive Andrew Ferrier said demand for dairy products was unlikely to recover by mid-2009 as initially expected.

"While the medium-to-long-term outlook for dairy remains positive the financial crisis has driven commodity prices down further and, with consumer confidence deteriorating, it is likely that prices will remain weak, rather than recover, through our fiscal year."

As the world economy retreats, commodity stocks are building and these will need to be cleared before prices improved.

"This combination of excess stocks and weak demand has driven prices down rapidly," Mr Ferrier said.

"A rebalancing of the market is unlikely in the short-term."

The market had not yet absorbed the surplus stocks from the US and stocks in the European Union are building.

Mr Ferrier said the $6/kg forecast comprised a milk price of NZ$5.60/kg, down 65c, and a value return of NZ$40c/kg a 5c increase.

Lower commodity prices would improve margins in some markets for the consumer brands businesses, but Fonterra expected lower demand for such fast-moving consumer goods.

"The forecast improvement in Value Return is the result of potential improvements in the ingredients business due to lower commodity prices," he said.

But the price set for Fonterra's cooperative shares at the end of last season slumped by 18 per cent to $5.57/share, down by $1.22 from the 2007 season, driving down the total shareholder return -- a key business indicator for farmers -- by 13.4 per cent.

NZPA


NZPA