Fonterra lifts milk-price forecast

Fonterra has bumped up its 2018-19 forecast farmgate milk price range from $6-$6.30 to $6.30-$6.60.

Yesterday's announcement reflected the increases in global milk prices over the past quarter, chairman John Monaghan said.

Global demand had strengthened since Fonterra's last milk price update in December, driven predominantly by stronger demand from Asia.

The EU's intervention stocks of skim milk powder had also now cleared for the season and demand for SMP was expected to be strong, Mr Monaghan said.

Fonterra also revised its forecast earnings down to 15c-25c per share and said it would not pay an interim dividend.

A decision on any full-year dividend could only be made at the end of the financial year and would depend on the co-operative's full-year earnings and balance sheet position.

While the milk price was strong, Fonterra's earnings performance was "not satisfactory" and it needed to deliver farmers and unit holders a "respectable return" on their investment, Mr Monaghan said.

The board was making solid progress with a full review of the strategy, which included a review of the dividend property.

An update on the strategy and the progress made on a portfolio review would be provided when the interim results were announced on March 20, he said.

Chief executive Miles Hurrell said the underlying performance of the business was "not where it needs to be".

The main pressure points on earnings were the challenges in its Australian ingredients and its Foodservice's businesses in wider Asia.

While inroads were being made in addressing those challenges, they would not be solved overnight.

The impact of difficult trading conditions in Latin America, mainly due to geopolitical situations, was also being felt.

"In addition, the increase in milk price, which is the primary cost input into our non-milk price products, has put pressure on the margins for those products, and they significantly contribute to our earnings," he said.

Good progress was being made on the portfolio review and asset divestments to reduce debt by $800 million this financial year, he said.

Westpac senior economist Anne Boniface said it would be interesting to see how markets responded to the update in next week's GlobalDairyTrade auction.

If concerns about the impact of dry weather on milk production persisted, there could be a further lift in prices.

That would add upward pressure on both the bank's $6.30 milk price forecast for the current season and its $6.75 forecast for 2019-20, she said.

Earlier this week, ANZ revised its milk price forecast for 2018-19 from $6.10 to $6.30, while its forecast for next season was up from $6.90 to $7.30.

 

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