Fonterra placed on S&P credit watch following milk price forecast cut

By Mark ASTLEY contact

- Last updated on GMT

Fonterra placed on S&P credit watch following milk price forecast cut

Related tags: Global dairy, Global dairy market, Milk

Fonterra has been placed on negative credit watch by ratings agency Standard and Poor's on the same day it announced plans to reduce its Global Dairy Trade (GDT) offering.

Earlier today, Standard and Poor's placed 'A' long-term and 'A1' short-term ratings on Fonterra's credit - a move the ratings agency said reflects weakening global dairy market conditions. 

“The CreditWatch placement reflects our concerns regarding potential weakness in Fonterra’s key financial metrics given its high debt levels at a low point in the global price cycle," ​said Brenda Wardlaw, credit analyst, Standard and Poor’s.

"This follow’s Fonterra announcement of a lower forecast milk price due to weak demand and surplus supply in the global dairy market," ​she said.

Fonterra last week slashed its farm gate milk price (FGMP) forecast for the 2015/16 season from NZ$5.25 to NZ$3.86 per kilogram of milk solids (kgMS) to account for the current "imbalance"​ in supply and demand. 

It also reduced its milk volume forecast to 1.568bn kgMS for the season – down 2% on 2014/15.

Responding to the Standard and Poor's announcement, Fonterra said it has "taken proactive and positive steps to maintain the financial strength of the Coop." 

“We have continued to exercise financial prudence and discipline in challenging times for dairy globally,”​ said Lukas Paravicini, chief financial officer, Fonterra.

For example, Fonterra said, it is working at "significantly reducing capital expenditure"​ and has set itself the target of spending between NZ$500m and NZ$600m less in FY 2016.

“These measures reinforce our sound financial position and are enabling us to provide support to our farmers during this difficult period of low global dairy prices,”​ said Paravicini.

GDT offering reduction

In a separate statement, Fonterra today announced it has reduced its Global Dairy Trade (GDT) volume forecast for the next 12 months by 56,045 tonnes.

It plans to cut its offering over the next three months by 62,930 tonnes, but will add on 6,885 tonnes later in the year "in anticipation of changing market conditions."

“In response to current conditions in the global dairy markets, we have further modified our product mix to shift volumes away from base whole milk powder (WMP) and into our other products in our portfolio such as value-add ingredient, consumer and foodservice,”​ said Kelvin Wickham, managing director of global ingredients, Fonterra.

Earlier this month, Fonterra dismissed calls for the GDT auction – established by the New Zealand dairy giant in 2008 - to be suspended after a tenth consecutive fall in prices.

The GDT Price Index – a weighted average of the percentage changes in prices – fell 9.3% after a bi-monthly auction on August 5.

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Days later, on August 7, it was announced that US dairy giant Land O'Lakes had formally withdrawn from the auction platform. 

“We understand the reasons for Land O’Lakes decision and we would certainly welcome them back in future should they wish to utilise our service,”​ said Eric Hansen, director, GDT.

Land O'Lakes joined GDT as a seller in March 2014 offering skim milk powder (SMP), but had not offered product for more than six months.

In April, it was announced German dairy Molkerei Ammerland had withdrawn from selling product on the GDT platform. 

Seven sellers - Amul (India), Arla Foods (Denmark), Arla Foods Ingredients (Denmark), DairyAmerica (USA), Euroserum (France), Fonterra (New Zealand) and Murray Goulburn (Australia) - continue to offer commodity dairy products, including anhydrous milk fat (AMF), butter, cheddar, lactose, SMP and whole milk powder (WMP).

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