UPDATE 2-NZ's Fonterra sees milk prices near historical highs next season

Tue May 27, 2014 10:45pm EDT

Related Topics

* Fonterra sets record high milk payout of NZ$8.40 for 2013/14

* Cuts 2014/15 payout f'cast by 17 pct but may revise higher

* China demand could slow if prices revisit record highs (Recasts throughout, adds CEO comments)

By Naomi Tajitsu

WELLINGTON, May 28 (Reuters) - New Zealand's Fonterra , the world's largest dairy exporter, signalled robust demand from China, Latin America and Southeast Asia would keep milk product prices near historical highs in the coming season.

In a country where dairy exports account for a quarter of all exports, high milk prices and solid payouts to dairy farmers are a boon to economic growth and support the New Zealand dollar.

Fonterra's payout to its farmer shareholders for the current season that winds down this month was finalised at NZ$8.40 per kilogram of milk solids - the highest since the dairy co-operative was formed in 2001.

Higher production around the world has pressured global dairy prices in recent months, prompting Fonterra to set its initial forecast for the coming season at NZ$7.00, but that may be revised up in quarterly updates if China's appetite for milk formula and other dairy products grows as the firm expects.

"We're still looking at good prices for the milk powders," Fonterra Chief Executive Officer Theo Spierings told Reuters in an interview.

New Zealand's milk powder exports to China doubled to NZ$4 trillion ($3.4 trillion) in 2013, and Spierings said that exports could still grow if Fonterra's payout for the coming year was around NZ$8.00.

"China could bear NZ$8.00 but if it goes significantly north of NZ$8.00 that's going to be painful because then you see a slowdown in demand," he said.

Fonterra's payouts to farmers are based on volatile benchmark global dairy prices set at fortnightly auctions conducted by the co-operative and which have mostly hovered at all-time highs over the past year. Fonterra has only limited leeway in adjusting the payout level under its constitution.

High payouts, however, also crank up input costs and cut into Fonterra's operating margins, prompting the cooperative to warn late last year that its dividend would be slashed to 10 cents per share from 32 cents, while earnings for the year ending in July would fall to around NZ$500 million-NZ$600 million from NZ$1 billion in 2012/13.

PROTECTING NZ SUPPLY

To benefit from higher prices and growing production, Fonterra needs to boost its domestic milk powder processing capabilities, Spiering said, adding that the co-operative is looking to build two additional plants in the country and is looking at acquisition opportunities in Australia.

Fonterra processes roughly 80 percent of all milk produced in New Zealand, but faces growing competition from overseas interests to secure supply in the small island nation.

France's Danone SA this month said it will buy a milk powder processing plant in New Zealand, while China's Inner Mongolia Yili Industrial Group and milk powder maker Yashili International Holdings Ltd will soon start production at new milk powder processing plants in the country.

Spierings said Fonterra would fight to maintain its share of the domestic supply market by offering competitive payout prices and flexible supply contracts.

"We are going to be more aggressive on market share because we really want to protect it," Spierings said. "Any competition we will look at."

Fonterra also has to contend with a lawsuit from Danone, which is seeking compensation following a product recall triggered last year when Fonterra mistakenly said one of its ingredients may have been tainted by a potentially fatal bacteria.

While Spierings was upbeat about the outlook for milk prices, ANZ Bank rural economist Con Williams noted that if the payout was finalised at $NZ7.00, it would result in a cut to dairy income of NZ$2.2 billion. That would be roughly equivalent to 1 percent of GDP, although the payout level would be still enough to ensure solid incomes for farmers, he said. ($1 = 1.1716 New Zealand Dollars) (Reporting by Naomi Tajitsu; Editing by Edwina Gibbs)

FILED UNDER: