UPDATE 1-New Zealand’s Fonterra ups dairy payout forecast, sees margin squeeze

(Reuters) – New Zealand’s Fonterra raised its milk price forecast for the upcoming 2013/14 financial year by 7 percent on Wednesday due to climbing global dairy prices and a weaker New Zealand dollar.

The world’s largest dairy exporter also said that higher prices may sting its cost margins in the financial year beginning in August, prompting a 3 percent slide in the Fonterra Sharetrading Fund as the announcement followed a downward revision of its 2012/13 earnings forecast last week.

The cooperative, New Zealand’s largest company, raised its forecast payout to shareholder farmers to NZ$7.50 per kg of milk solids from an initial forecast before retentions of NZ$7.00, in line with market expectations for an upward revision.

With the addition of a 32-cent forecast dividend, this would result in a final cash payout of NZ$7.32, a jump of roughly 20 percent from a forecast payout of NZ$6.12 for the 2012/13 financial year ending on Wednesday.

Analysts said the higher forecast would contribute an additional 1.6 percent to the country’s nominal economy after factoring in a widely expected rise in production in the 2013/14 year. The dairy sector generates more than 7 percent of the country’s GDP.

The higher forecast comes as overall global dairy prices set at Fonterra’s benchmark fortnightly auctions remain strong due to a fall in milk production during the northern hemisphere spring season.

In April, prices hit their highest level since the trading platform began around 2008, and have hovered near those levels since.

A slide in the New Zealand dollar from a 20-month high versus the U.S. dollar since April has also been positive for the country’s dairy industry, as a historically strong currency has constrained demand for exports.

Analysts said that the higher forecast also reflected better-than-expected recovery from drought conditions in the country that sapped production earlier this year.

“We think New Zealand production can rebound quite strongly from the drought,” said Westpac economist Nathan Penny, who had expected a forecast price of NZ$7.40.

“More than likely Fonterra has pencilled in less production, and with less production, prices would go higher,” he added.

He added that he saw the potential for the forecast price to rise further throughout the year if global dairy prices continue to rise, or if the New Zealand dollar pushes lower.

Fonterra added that higher global dairy prices would raise its costs to buy liquid milk from farmers to process into milk powder and other materials to export to countries including China, a major importer of milk powder.

“During the first half of FY14 we are likely to have to absorb some of the expected substantial increases in the cost of goods arising from current high commodity prices, and this could have an impact on margins,” CEO Theo Spierings said in a statement.

Shares in Fonterra’s sharetrading investment vehicle fell to NZ$7.25 in early trade, retreating after they closed at NZ$7.49 on Tuesday on concerns that higher prices could weigh on earnings from the company’s processing operations.

“The dairy payout is great for dairy producers as it’s supporting their businesses after a touch drought period,” said Shane Solly, portfolio manager at Mint Asset Management.

“But the higher cost base is impacting on the potential returns on the Fonterra share fund, so we’re seeing a fall in its price.”

Fonterra is preparing to enter China’s booming branded infant formula market later this year. Earlier this month, it cut the price of its Anmum brand of maternal milk products sold in the country as Beijing reigns in sky-high prices for formula products.