Fonterra announces record opening milk price for next season on strong demand

Wednesday, 26 May 2021

Fonterra announced a record opening milk price to farmers for next season.

Fonterra forecast a record opening milk price for farmers next season, underpinned by an improving global economy, and strong demand for dairy relative to supply.

The co-operative announced an opening forecast for the 2021/22 season starting on June 1 of between $7.25 per kilogram of milk solids to $8.75 per kgMS, with a mid-point of $8 per kgMS. Its previous highest ever opening price was $7 per kgMS.

The mid-point of the forecast would see the co-operative contributing more than $12 billion to the economy next season.

Whole milk powder prices on the global dairy trade platform are 54 per cent higher than a year ago and analysts say they are likely to stay elevated as farmers are constrained from increasing supply by environmental factors and high feed prices. Demand for dairy products is being driven by China, where a wealthier population and an increased focus on health and wellbeing after the Covid-19 pandemic is stoking demand for better nutrition.

“Global demand for dairy, especially New Zealand dairy, is continuing to grow,” said Fonterra chief executive Miles Hurrell. “China is leading the charge as its economy continues to recover strongly. Prompted by Covid-19, people are seeking the health benefits of milk and customers are wanting to secure their supply of New Zealand dairy products and ingredients.

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“Growth in global milk supply seems muted and the global supply of whole milk powder is looking constrained,” he said. “Based on these supply and demand dynamics, along with where the NZ dollar is sitting relative to the US dollar, we’re expecting whole milk prices to remain at current levels for the near future.”

Hurrell said there are a number of risks over the next 18 months which is why at this early stage the co-operative has opted for a large range in the milk price.

Those risks include Covid-19, the impacts of governments winding back their economic stimulus packages, foreign exchange volatility, changes in the supply and demand patterns that can enter dairy markets when prices are high, and potential impacts of any geopolitical issues around the world, he said.

Having sold most of its milk for the current 2020/21 season, Fonterra narrowed this season’s forecast farmgate milk price range to between $7.45 per kgMS to $7.65 per kgMS, from $7.30 per kgMS to $7.90 per kgMS. The mid-point of the range slipped to $7.55 per kgMS from $7.60 per kgMS.

Fonterra will release the final price for this season in September.

Fonterra chief executive Miles Hurrell says higher milk prices are weighing on profit margins.

“Since March, we have seen prices settle, somewhat, which is why we have revised our mid-point down 5 cents,” Hurrell said.

In March, Fonterra increased its forecast for the current season after prices on the global dairy trade (GDT) platform jumped 15 per cent, pushing the average price for whole milk powder to more than US$4350 (NZ$6019) per metric tonne.

However in the last three GDT events, the average price has reduced to about US$4100/t and butter prices have gone from almost US$6000/t to below US$5000/t for the first time since January, he said.

Ahead of Fonterra’s statement, economists’ forecasts for next season were between $7.60 per kgMS and $8.20 per kgMS. For this season, they were expecting between $7.60 per kgMS and $7.90 per kgMS.

Fonterra paid its 10,000 farmer suppliers $7.14 per kgMS last season. Its highest ever milk price was $8.40 per kgMS for the 2013/14 season, and an $8 milk price would be the second highest.

Hurrell warned that the higher milk prices increase the co-operative’s input costs and existing contracts with customers meant there is a delay in passing through the increased costs.

That weighed on profit margins in the third quarter, and is also expected to impact the fourth quarter, he said.

The co-operative’s gross margin slipped to 13.9 per cent in the third quarter, from 17.4 per cent in the first half. That pulled down the gross margin for the nine months to the end of April to 16.1 per cent, although it remains above the 15.4 per cent margin at the same time last year.

“We’re forecasting increased pressure on margins in the fourth quarter,” Hurrell said. “This is compounded by the normal seasonal profile of our business, where we have our ongoing fixed costs but lower volumes of milk being processed and sold.

“The fourth quarter will be challenging from an earnings perspective and we expect the margin pressure to continue into the first quarter of the 2022 financial year.”

Fonterra’s nine-month profit excluding one-time items increased 61 per cent to $587 million, reflecting an improved underlying business and stronger balance sheet as it paid down debt. Its reported profit edged up 2 per cent to $603m.

Normalised earnings per share increased 57 per cent to 34 cents in the nine-month period. Fonterra maintained its full-year guidance for between 25c and 35c, and guided towards the mid-point of the range given earnings are expected to come under pressure in the fourth quarter.

Greater China was the standout performer in the nine-month period, with pre-tax normalised profit up 30 per cent to $457m. Pre-tax profit from the Asia Pacific region fell 10 per cent to $224m, while pre-tax profit in its Africa, Middle East, Europe, North Asia and Americas (AMENA) business fell 11 per cent to $322m.