May 25, 2016 / 8:56 PM / 4 years ago

Fonterra expects to pay NZ$4.25 per kilo of milk solids in 2016-17

WELLINGTON, May 25 (Reuters) - Global dairy giant Fonterra Co-operative Group Ltd, expects to pay its farmer shareholders more in the upcoming season, but the amount will offer little relief as it remains below estimated break-even levels.

The world’s largest dairy exporter said it would pay NZ$4.25 ($2.86) per kilogram of milk solids in the 2016-17 season versus NZ$3.90 in the season just ending.

Chairman John Wilson said Fonterra’s forecast took into account a range of factors including the high New Zealand dollar exchange rate, supply volumes from other major dairy regions, global inventory levels, and the economic outlook of major dairy importers.

Four economists polled by Reuters had expected Fonterra to pay between NZ$4.50-NZ$5.00.

Until recently, dairy was the backbone of New Zealand’s economy, representing around 25 percent of exports. But prices have tumbled by more than half since early 2014, hurt by China’s economic slowdown and global oversupply.

Weak dairy prices have put significant pressure on New Zealand farmers. More than 85 percent of dairy farmers were already estimated to be running at a loss.

The forecast marks the third year of low payouts and remains below an estimated break-even level of around NZ$5.28.

“We are expecting global dairy pricing to gradually improve over the season as farmers globally reduce production in response to ongoing low milk prices, however we continue to urge caution with on-farm budgets,” said Wilson.

Looking ahead, Chief Executive Theo Spierings said the long term fundamentals for global dairy remain positive with demand expected to increase by two to three per cent a year due to the growing world population, increasing middle classes in Asia, urbanization and favorable demographics.

Reporting by Rebecca Howard; editing by John Stonestreet

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