Fonterra Forecasts $5.53 Payout

23 May 2007

Fonterra Forecasts $5.53 Payout And Increases Fair Value Share

Fonterra Co-operative Group is forecasting a payout of $5.53 per kg/MS for the 2007/08 season. The co-operative has also set its Fair Value Share price for the season at $6.79, an increase of 3.5 percent.

The 2007/08 forecast is $1.18 per kg/MS (27%) higher than the current season forecast of $4.35 per kg/MS. It includes a milk price component of $5.33 per kg/MS, a value add component (essentially profit) of 20 cents per kg/MS and is based on an average exchange rate of 71 cents.

Chairman Henry van der Heyden said the record payout forecast was the result of exceptionally high commodity prices and continued business improvements and cost efficiencies.

“The commodity prices are being driven by unprecedented market conditions where strong global demand for dairy products is continuing to outstrip a tight milk supply market,” he said. “We expect these market conditions to continue this year and this gives us confidence in putting forward our highest ever forecast.”

Mr van der Heyden said farmers will welcome the higher forecast and the relief it will bring to farm budgets which have been under tight cash flow pressures.

“Along with commodity prices, the exchange rate remains the biggest influencer over the payout. Any material movements in the NZ vs US exchange rate during the season are likely to affect the forecast.”

Mr van der Heyden repeated his warning that the downside of the high commodity prices was the negative impact on the value add component of payout which is forecast at 20 cents per kg/MS - down from 51 cents per kg/MS forecast for the current season. The value add component of payout comes from Brands and Foodservices profits, Specialty Ingredients profits and premiums realised over base commodity prices.

“Growth in our Brands businesses is helping offset the very high prices, delivering a stable outlook for the Brands business. However, our Ingredients businesses will face a tough year, particularly in more developed economies where sales prices are linked to internal domestic prices, rather than the world market.“ Mr van der Heyden said. The Fair Value of a Fonterra share has increased by 23 cents from $6.56 to $6.79. The independent valuer, Duff & Phelps assessed the Fair Value Share to be in the range of $6.46 to $7.51 with a mid point of $6.99.

The Board resolved to set the Fair Value Share value for next season at 20 cents below the independent valuer’s mid point. It considers that the sharp rise in commodity prices during the past two months will reduce margins in the value add businesses. This negative impact from the high commodity prices was not so appare_nt when the Fair Value Share was assessed by the independent valuer based on assumptions as at March 31.

In December the Board signalled it was undertaking a review of the treatment of taxation in the valuation process. This review has been completed and taken into account in the Board’s overall assessment of the valuation and the setting of the Fair Value Share price.

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