Fonterra expects continued strong demand for dairy products and constrained supply to underpin prices next season.
- Fonterra announced a record opening milk price for farmers next season
- CEO Miles Hurrell said the long-term outlook for dairy is positive
- High milk prices hurt profit margins
- Profit fell 22% in the 9 months to April 30
Fonterra announced a record opening milk price payment for farmers next season underpinned by continued strong demand for dairy products and constrained global supply. But its profit fell.
The co-operative expects to pay farmers between $8.25 and $9.75 per kilogram of milk solids for the season starting next month. The $9 per kgMS mid-point, which farmers are paid off, beats the previous record set this time last year of $8 per kgMS.
The country’s largest dairy company has raised its forecast payment to farmers four times this season as tight milk supply underpins demand for New Zealand’s biggest export commodity. Disruption in Ukraine, China and Sri Lanka has weighed on recent global auction prices, prompting Fonterra to pull back its forecast earlier this month, but it expects those impacts will be short term.
“The long-term outlook for dairy remains positive, despite recent geopolitical and Covid-19 related events impacting global demand in the short-term,” said chief executive Miles Hurrell.
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“On the supply side, growth from key milk producing regions is expected to remain constrained as high feed, fertiliser and energy costs continue to impact production volumes. These demand and supply dynamics are expected to support dairy prices in the medium to long-term.”
Fonterra factors in fat and protein levels in milk when buying it off farmers.
However, Hurrell said the company was operating in an increasingly volatile global environment and is managing a wider range of risks than usual.
“This includes the potential for further impacts from Covid-19, financial markets and foreign exchange volatility, global inflationary pressures, a tightening labour market, increasing interest rates, geopolitical events, as well as the possible impact on demand from higher dairy prices,” he said.
“This is why our 2022/23 forecast range is so wide at this point in the season.”
Fonterra reiterated its forecast for the current season of between $9.10 and $9.50 per kgMS. The $9.30 per kgMS midpoint would be the highest milk payment since Fonterra was formed in 2001, injecting almost $14 billion into New Zealand’s economy.
However the high milk payments to farmers and global disruptions have impacted Fonterra’s profitability.
The company reported a 22% drop in profit to $472 million for the nine months to the end of April, but retained its forecast earnings guidance for the full year of 25-35 cents per share.
Fonterra’s sales volumes fell 4% as a result of lower milk collections and the timing of sales due to short-term impacts on demand including the Covid-19 lockdowns in China, the economic crisis in Sri Lanka and the Russia-Ukraine conflict.
Its gross profit margin fell to 14.3% from 16.1%, and Hurrell said he expects the pressure on margins to continue.
The co-operative’s Africa, Middle East, Europe, North Asia, Americas region was the best performer, with earnings up 30% to $406m as it benefited from higher margins in its ingredients business and a strong performance from its Chilean business, which is up for sale.
By contrast, earnings from Greater China fell 17% to $317m as increased sales of higher margin products in its ingredients business wasn’t enough to offset pressure on margins from the higher milk price, particularly in its foodservice business, as well as the impact of Covid-19 lockdowns.
“Aside from some supermarkets, all restaurants and other food outlets were closed in Shanghai in early April to contain the Omicron outbreak,” Hurrell said. “While restrictions have started to ease, a number of food outlets remain closed, while other cities across China are facing Covid-19 restrictions.
“The impacts of this, and the disruptions to supply chains, have been felt across the market and is reflected in our Greater China sales volumes which are down on the same time last year,” he said.
Fonterra’s staff in China were finding innovative ways to get dairy products to consumers, such as supplying products directly to big buying groups in apartment blocks, he said.
Hurrell said Fonterra remained “really positive” about the Chinese market over the medium to longer term and expected the market to return to more normal levels coming into the new season around August.
Its Asia Pacific earnings fell 43% to $177m, and included a $81m hit due to the rapid devaluation of the Sri Lankan rupee.
“While our Australian business and Ingredients channel continued to perform well, this was more than offset by the unprecedented economic challenges in Sri Lanka, margin pressure from the higher milk price and other Covid-19 related challenges,” Hurrell said.