August 9, 2018 / 9:05 PM / 7 months ago

UPDATE 3-NZ dairy giant Fonterra cuts guidance, as tight margins pressure balance sheet

* NZ’s Fonterra cuts earning guidance

* Will not pay further dividend beyond April’s NZ$0.10

* Value-add branded businesses struggle with tighter margins

* Situation “unacceptable” - shareholders (Adds comment from shareholder council)

By Charlotte Greenfield

WELLINGTON, Aug 10 (Reuters) - New Zealand’s Fonterra , the world’s largest dairy exporter, cut its earnings guidance on Friday and lowered its forecast milk payout, looking to bolster its balance sheet amid tighter than expected margins.

Shares in Fonterra’s traded fund fell 3.1 percent to NZ$4.95, a near three-year low, after the firm’s second profit downgrade in three months.

The co-operative said in a statement that it had revised its forecast 2017/18 farmgate milk price - the price it pays farmers - down by 5 cents to NZ$6.70 per kg of milk solids.

It would also hold its full-year dividend at the 10 cents a share already paid in April, down from 40 cents in the previous year.

“Our forecast performance is not where we expected it would be,” said Chairman John Monaghan.

“While the numbers are not finalised, our margins were less than we forecasted right across our global Ingredients and Consumer and Foodservice businesses.”

Fonterra said that higher milk prices had put pressure on earnings from its value-added branded products like yoghurt and cheese, and forecast full-year normalised earnings at or slightly below its previous guidance of 25 to 30 cents a share.

The firm said it wanted to maintain a strong balance sheet, rather than pay out more now to farmers, so it was well-positioned for any future tough seasons.

The head of the Fonterra Shareholders Council, which represents the views of its farmers, said the company needed to explain what the extra balance sheet contributions would be used for, and whether the strategy to pushing further into value-added products was working.

“I can understand the Board’s rationale and that it is prudent to protect the balance sheet, but the fact that we find ourselves in this situation is unacceptable,” said Duncan Coull, the council’s chairman said in a statement.

The lower dividend and milk price meant farmers may hold off on making large investments, said Nathan Penny, rural economist at ASB Bank.

“The season has still been a good one for them, but this has taken the cherry off the top,” said Penny, pointing to the relatively high farm-gate prices.

However, he estimated that Fonterra’s 13,000 farmers would on average each lose around NZ$15,000 to NZ$23,000 ($9,900 to $15,200) in extra expected earnings.

That, combined with the likelihood of a revision of the following year’s milk price down from its current NZ$7.00, could weigh further on already low business confidence, he said.

The result adds to growing headwinds for the New Zealand economy, just a day after the central bank unexpectedly committed to keeping interest rates at record lows through to 2020 and raised concerns about persistently disappointing growth.

In March, Fonterra posted a half-year loss, with a large writedown on its stake in Chinese infant formula producer, Beingmate.

The dairy giant is set to release its full-year earnings on Sept. 13. ($1 = 1.5149 New Zealand dollars) (Reporting by Charlotte Greenfield; additional reporting by Aditya Soni in Bengaluru; editing by Jonathan Oatis and Richard Pullin)

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