Fonterra raises milk price forecast

Chairman John Wilson of Fonterra – New Zealand , said the strong opening milk price would be very welcome news for the cooperative’s farmers as they look ahead to the new season.

“What we are seeing is a continued positive global supply and demand picture which gives us the confidence to increase our current forecast Farmgate Milk Price into the new season,” ​Wilson said.

“Demand is expected to remain strong – especially from China and for butter and AMF. We are expecting the global dairy market’s current prices, especially for fats, to continue throughout the new season.​

“We are also forecasting our New Zealand 2018/19 milk collections to be 1,525m kgMS, a 1.5% increase on our current forecast for this season, and we expect to see a lift in supply from the EU, US, Australia and Argentina. ​

“We will announce our forecast earnings per share for the 2019 financial year in July as normal. This, along with our forecast Farmgate Milk Price, comprises the total available for payout to our farmers.”​

Fonterra is required under the Dairy Industry Restructuring Act to announce its forecast milk price at the beginning of each season, which starts on June 1.

Higher milk price
The cooperative also increased its 2017/18 forecast Farmgate Milk Price by 20 cents to NZ$6.75 (US$4.66) per kgMS.

Wilson said the higher milk price is good news for farmers who are still recovering after the two years of lower milk prices in 2015 and 2016. However, the higher milk price puts pressure on Fonterra’s earnings in a year that is already proving challenging due to the payment to Danone and the impairment of the cooperative’s Beingmate investment.

“As a result, we are revising our forecast normalized earnings per share guidance range down to 25-30 cents per share and our forecast dividend range for the full year down to 15-20 cents per share,” ​Wilson said.

“The business’ revised earnings forecast is disappointing for our shareholders and unitholders. However, the total forecast cash payout for farmers increases to $6.90-$6.95 (US$4.77-4.80) per kgMS which is the third highest payout this decade.”​

Third quarter update
Fonterra’s revenue of $NZ14.8bn (US$10.2bn) for the first nine months of 2017/18 is up 7% on the same period last year, as a result of higher prices.

With total volumes down 5% to 16bn LMEs and gross margin down to 16% from 18% for the first nine months of the year, compared to the same period last year, Fonterra’s chief executive Theo Spierings said the business has not delivered the third quarter results it had planned.

“With the increase in the price of milk fats we have also seen continued demand towards products with a lower fat composition, sustained competition in Greater China’s foodservice market and further constraints in some Asian markets limiting our ability to pass through costs,”​ Spierings said.

“These challenges, along with the Danone payment and the impairment of our Beingmate investment mean our gearing ratio is expected to be above our target 40-45% range. We expect to be back within the target range next year.​

“While the strong milk price is good for our farmers, it does make the remainder of the year challenging for the business. We remain committed to maximising the total payout for our farmers and value for our unitholders by delivering the best possible earnings.”