THE world's biggest milk exporter, Fonterra, is bullish about global dairy prices, predicting them to rebound from two-year lows in the first half of 2016.
The upbeat forecast came as the New Zealand co-operative raised its earnings guidance for this financial year. Chairman John Wilson said its financial performance was "well ahead of last year" and its business transformation plan - which involved hundreds of job cuts across its global operations - was "generating significant cash savings".
Fonterra now expects its earnings to be NZ45-55¢ (41-46¢) per share for the 2016 financial year, up from 40-50¢. It expects an annual dividend of NZ35-40¢.
"While it is tough on farm due to low global milk prices, farmers will welcome the ongoing improvement in Fonterra's performance delivering increased returns," Mr Wilson said.
The Auckland-based company expects to pay farmers $NZ4.60 per kilogram milk solids this season, up from $NZ4.40 last season.
Chief executive Theo Spierings said that price hinged on whole milk powder fetching $US3000 ($4217.75) a tonne at the Global Dairy Trade auctions. Whole milk powder dipped 8 per cent to $US2453 a tonne at the latest GDT auction earlier this month.
But Mr Wilson nevertheless expected prices to rebound quickly. There's "an expectation that prices will move up through the first half of 2016", Mr Wilson said.
"We certainly expect it to start moving up over the coming months." Mr Spierings said a persistent oversupply of milk on global markets, which has almost halved the prices of several key dairy commodities, was abating. He said the rate of milk production growth in big dairy exporting countries had eased, with New Zealand falling 1 per cent and both the European Union and United States slowing to 1 per cent growth from January to August 2015.
"In addition, an increased portion of product is being sold through bilateral customer agreements for a premium on prices achieved on GDT," Mr Spierings said. He said the business transformation plan had generated cost savings of $170 million this financial year, which had helped underpin the farm gate price.
"Further initiatives in the second quarter are expected to increase recurring cash benefits to $340 million and contribute to both earnings before interest and tax and the farm gate milk price in the current financial year."
Although Mr Spierings and Mr Wilson were upbeat about global dairy prices, they are still half of what they were in the 2013 and 2014 seasons.
The slump comes as demand for infant formula, mainly from China, has stripped the product off Australian supermarket shelves in what has been labelled a "white gold rush", which will help deliver a better return for farmers.
Milk processors have been shifting their product mixes to more high-value goods such as infant formula and less of the commodity powders, which are sold on the GDT.
But Rabobank dairy analyst Michael Harvey said infant formula demand wasn't a "silver bullet" for the industry.
Despite an increased appetite in China for infant formula, it accounts for only 3 per cent of China's total dairy consumption. And dairy makes up about 30 per cent of the ingredients found in infant formula, Mr Harvey said.