Fonterra Planning on Steady Global Milk Powder Prices, CFO Says

(Bloomberg) -- Fonterra Cooperative Group Ltd. isn’t banking on further strong gains in global dairy prices in the coming months even as supply wanes, Chief Financial Officer Lukas Paravicini said.

“We will see a gradual increase in prices on supply reduction rather than a spike in demand,” Paravicini said in a phone interview Thursday after the Auckland-based company announced a 65 percent jump in full-year profit. Prices for whole milk powder, New Zealand’s core farm export, are “slightly below $3,000 and at this stage we have planned for it to stay around that figure for the season,” he said.

Whole milk powder prices climbed to $2,782 at auction this week from a 2016 low of $1,894 touched in February. Fonterra, the world’s biggest dairy exporter, on Wednesday raised the forecast payment to its farmer shareholders for the season ending in May next year to NZ$5.25 ($3.85) per kilogram of milksolids, noting a slowdown in European dairy production and a decline in local milk collection.

The cooperative’s projected milk payout exceeds the level the average New Zealand dairy farmer needs to break even, according to industry group Dairy NZ. Higher incomes are expected to lift farm spending and boost economic growth. Reserve Bank Governor Graeme Wheeler noted recent dairy price gains in a policy review Thursday, but added the outlook for prices “remains very uncertain.”

Global dairy supply and demand are now “getting back into balance,” Paravicini said. He expects auction prices to hold their recent gains and “then it largely depends on Chinese demand and when European production starts again -- how they will behave,” he said.

Fonterra’s payments to farmers also take into account the strength of the New Zealand dollar, which has surged 17 percent the past year.

“We believe the New Zealand dollar is currently overvalued,” said Paravicini. “We would like to see it a bit lower.”

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net. To contact the editors responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net, Emma O'Brien