Fonterra Sets Opening Forecast for 2009/10 Season at $4.55 per kgMS

Fonterra Co-operative Group announced today an opening forecast payout for the 2009/10 season of $4.55 per kilogram of milksolids (kgMS) – reflecting low international dairy commodity prices and an assumed exchange rate of around US59 cents to the New Zealand dollar.

27/05/09 Fonterra Chairman, Henry van der Heyden, said a volatile currency and continued uncertainty in international dairy markets made forecasting extremely difficult and a constant challenge in the current environment.

“We were looking at a forecast over $5 when the Kiwi was at 50 cents but the rebound means we’re now working with a dollar that’s 10 cents higher. And, just this week – at a time when we’ve been seeing some tentative signs of recovery in the global dairy market – the US Government has announced export subsidies for their farmers, which is bad news for our farmers,” he said.

The Co-operative has set its Fair Value Share (FVS) price for 2009/10 at $4.52, the mid-point of the valuation range provided by the independent valuer, Duff & Phelps. The price is 5 cents higher than the estimate in December but $1.05 lower than the $5.57 price for 2008/09. The lower price is largely the result of the major changes in global equity and financial markets over the past year.

Mr van der Heyden said the fall in the share price was understandable given the external factors which have seen a dramatic drop in share values around the world. But the payout forecast was lower than the Board had anticipated due to the recent strengthening of the New Zealand dollar against the US dollar.

Mr van der Heyden said with farmers’ cash flows extremely tight, and a somewhat improved balance sheet, the Board had also decided to bring forward to August this year a payment of 20 cents per kgMS of the Value Return for the current 2008/09 season. The payment which totals about $250 million was previously deferred to be paid with this season’s final payment in October.

2009/10 PAYOUT FORECAST

The opening forecast payout for the 2009/10 season (beginning June 1) of $4.55 per kgMS comprises a Milk Price of $4.10 and Value Return of 45 cents per kgMS. This compares with a forecast Milk Price of $4.75 and a Value Return of 45 cents in the current 2008/09 season.

Mr van der Heyden said: “We had expected dairy prices to be bouncing along the bottom at the moment, but the exchange rate has been a big negative. It has a huge influence on the Milk Price forecast when you go into the new season with a large chunk of your sales unhedged, which is always the case at this time of the year.”

“Our hedging policy is designed to take out the volatility and provide as much certainty for our farmers as possible. But as a rule of thumb a 1 cent movement in the exchange rate realised over a year has an impact of about +/- 10 cents per kgMS in the Milk Price, with everything else being equal.”

“We’d certainly like to see the exchange rate come down and stay lower. That would benefit our farmers and New Zealand’s export returns. Our farmers are already under severe financial pressure and it’s also bad news for the country as a whole. A payout at this level would take hundreds of millions of dollars out of the economy."

Mr van der Heyden said it was positive that Fonterra was forecast to earn a Value Return of 45 cents per kgMS, consistent with this season.

“In the current economic outlook, sustaining our earnings for the current season is a good outcome. This is an indication of the underlying strength of our operating businesses,” he said.