Fonterra lifts prices

MIles Hurrell
MIles Hurrell
Fonterra farmers have received an early Christmas present — the co-operative has raised its forecast farmgate milk price range to a range of $8.40-$9, up from $7.90-$8.90.

With a record midpoint of $8.70 per kilogram of milksolids (kg ms), that will contribute more than $13.2 billion to the New Zealand economy.

The higher milk price had seen the co-operative revise its earnings guidance from 25c-40c per share to 25c-35c.

In a statement, chief executive Miles Hurrell said the lift in the forecast farmgate price range was "good news" and an important boost to communities. It was the result of consistent strong demand for dairy at a time of constrained global supply.

"We’ve seen the impact of a number of events play out this first quarter. This includes the high price of feed in the US which has seen milk production growth stall and a lower-than-expected supply picture in Europe.

"Fonterra’s New Zealand milk supply is down around 3% on this time last season. While we expect that milk supply will be less than last season’s 1539 million kg ms, the improving weather conditions and forecast milk collections for the balance of this season, that are generally on par with last season, support our current season forecast of 1525 million kg ms."

While demand had softened slightly in China, global demand remained strong and Fonterra believed that would remain in the short to medium term.

Fonterra also released a first quarter business update, which showed a total group ebit of $190 million for the three months ending October 31, down $60 million on the same period last year.

Mr Hurrell said it was achieved at a time when input costs were significantly higher than the same period last year, driven by a 30% increase in whole milk powder prices.

Various factors had been at play in the first quarter.

“We’re seeing stable sales volumes in our food-service channel, but a milk price at these high levels has squeezed margins. Our Chilean business continues to improve but tightening margins and weaker local currency in other markets have impacted our consumer channel overall.

“In our ingredients channel, we’re seeing margins in our longer-term pricing contracts return to more normal levels, which has helped push total group gross margin up from the last quarter last year," he said.

The co-operative continued to see the benefit of its focus on financial discipline with lower interest expense, and operating expenditure down 2% on the same quarter last year.

“Looking at the whole picture, I’m proud of what we’ve achieved. With ebit of $190 million and a strong farmgate milk price, we are starting to consistently deliver solid commercial outcomes,” Mr Hurrell said.

ASB economist Nathaniel Keall said the bank was confident the farmgate milk price would wind up at or above the midpoint of Fonterra’s latest forecast range.

Lifting the bottom end of the range was a "no-brainer". The co-operative’s S1 range was looking a little wide at this stage in the season, and at the prices product had been sold for.

When taking into account the likely extent to which the co-operative had hedged its FX exposures, it would have taken a massive correction in prices to deliver a figure in the bottom end of the forecast range.

 

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