December 6, 2017 / 10:17 AM / a year ago

UPDATE 2-NZ's Fonterra cuts milk payout to farmers as global prices drop

* Fonterra cuts forecast 2017-18 payout to NZ$6.40 per kg

* Ramped up global supply leads to lower global dairy prices

* Strong demand, lower NZ output likely to underpin prices-analyst (Adds analyst comment, market reaction)

Dec 6 (Reuters) - New Zealand dairy co-operative Fonterra cut its forecast payout to farmers for the 2017-18 season by NZ$0.35 to NZ$6.40 per kilogram of milk solids on Wednesday, citing volatility in global dairy markets. Chairman John Wilson said in a statement on Wednesday that strong European production and high levels of skim milk powder stockpiles as a result of European Union intervention had put downward pressure on global prices.

That offset high demand for dairy in China, other parts of Asia and Latin America, Wilson added.

An almost ten percent fall in global dairy prices since August meant Fonterra’s lower forecast payout was largely flagged to farmers and markets, analysts said.

“Commodity prices just haven’t been performing at a level where Fonterra was able to pay that NZ$6.75 that they have been forecasting,” said Amy Castleton, dairy analyst at AgriHQ. Still, with strong global demand and dry weather conditions in New Zealand likely to curb its production, the outlook was not considered dire.

“I don’t think farmers need to be too concerned at the moment...we’re probably still looking at a milk price over NZ$6.00 so most farmers should still be making a profit this season at that kind of level,” Castleton said.

That was in stark contrast to Fonterra’s payouts of NZ$3.90 in 2016 as global dairy prices plummeted on waning demand.

The New Zealand dollar fell overnight from a one-week high of $0.6916 to around $0.6880, though gains were exacerbated by a stronger U.S. dollar. Dairy generates more than 7 percent of the country’s gross domestic product.

Fonterra also gave an update on its first quarter performance in the release, saying sales volumes in the first quarter fell 20 percent to 3.9 billion liquid milk equivalent (LME), due to poor performance in its dairy ingredients business.

Revenue rose 4 percent over last year to NZ$4 billion. Shares in Fonterra’s traded fund were largely flat on Thursday, edging down 0.3 percent.

Last week, the company flagged that its arbitration with French company Danone SA had an impact on its earnings guidance for the season but none on the farmgate milk price.

An arbitration tribunal had ordered Fonterra to pay Danone a smaller than expected 105 million euros ($124.05 million) over a contamination scare. ($1 = 1.4489 New Zealand dollars) ($1 = 0.8465 euros) (Reporting By Charlotte Greenfield in WELLINGTON and Rushil Dutta in BENGALURU; Editing by Muralikumar Anantharaman and Andrew Hay)

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