* Fonterra sets record high milk payout of NZ$8.40 for
* 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 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
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
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
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)