Will the payout fall?

$6.75/kgMS milk price projected by Fonterra still secure

In recent weeks investors have been asking, ‘Will the Fonterra payout fall with the rising exchange rate and falling commodity prices?’

In our view, the evidence says no, the $6.75/kgMS milk price is still relatively secure. Why?

• Fonterra has gone into 2010/11 with quite a volume of pre-sales.  The globalDairyTrade auction system used by Fonterra pre-sells product up to 8 months out with the majority of these sales at very good levels.
• Whilst Fonterra doesn’t make public its foreign exchange hedging position, at MyFarm we believe there is a significant portion of forward cover on hand at between 70 – 75 cents NZ to the USD.
• Actual prices being achieved are still above those assumed by Agrifax in their last estimate as shown in the following two figures;

Figure 1; To achieve the Agrifax forecast of $6.65/kgMS (too low in our view) requires average product prices of US$3780/t

• July / August is often a price rally point as shown in the following chart.

• Dairy commodity stock levels are still at very low levels – increased demand will translate quickly into increased prices.

Figure 4; Agrifax product storage information, July 2011

• All the demand drivers behind dairy are still firmly in place; population growth and increased numbers of middle class consumers seeking dairy protein.  This underpins dairy prices in the medium to long term.