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Fonterra Reduces Milk Payout in Troubling Times

03 February 2009

USDA Foreign Agricultural Service

NEW ZEALAND - After several years of rising dairy commodity prices, Fonterra is facing a difficult environment characterized by a significant drop in global dairy prices, the effects of the global credit crisis, a fluctuating New Zealand dollar, and increasing domestic production.

On January 28, 2009, Fonterra announced a 90 cent reduction in its payout price to NZ $5.10, down from a revised forecast of NZ $6.00 in November and an initial forecast of NZ $7.00. The cut in Fonterra’s payout price will shave off over 1 per cent of New Zealand’s gross domestic product.

The dairy sector is New Zealand’s top export earner and a key driver of economic growth, says a USDA Foreign Agricultural Service report. According to their information, during the first eleven months of CY 2008, the value of dairy exports increased 24.4 per cent to US $6.63 billion, accounting for approximately 27 per cent of the country’s total merchandize exports and approximately 8 per cent of GDP.

Although a handful of new processors are coming on stream, the dairy processing industry is dominated by Fonterra Cooperative Ltd, which collects approximately 94 per cent of the domestic milk supply and controls an estimated 40 per cent of world trade in dairy products. Fonterra is New Zealand’s largest company.

After several years of rising dairy commodity prices, Fonterra is facing a difficult environment characterized by a significant drop in global dairy prices, the effects of the global credit crisis, a fluctuating New Zealand dollar, and increasing domestic production.

Fonterra’s major cost of business is purchasing milk from its over 10,000 farmer shareholders. On January 28, 2009, Fonterra announced a 90 cent reduction in its payout price to NZ $5.10, down from a revised forecast of NZ $6.00 in Novemb er and an initial forecast of NZ $7.00 at the start of the 2008/09 season.

This compares to a record payout of NZ $7.90 during the 2007/08 season. The NZ $5.10 forecast is expected to be broken down into a milk price of NZ $4.65 and a value added return forecast of 45c, 5 cents more than the last prediction.

When announcing the revised milk price, Fonterra Chairman Henry van der Heyden said the lower forecast reflected the continuing decline in international commodity prices coupled with the ongoing effects of the global financial crisis. According to press reports, Fonterra Chief Executive Andrew Ferrier said economic data within global dairy markets suggest the industry is in for a difficult 12 to 18 months but the company is in a good position to work through these challenges. However, many press reports have speculated otherwise with analysts pointing to Fonterra’s high debt to equity ratio and inventory levels.

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