Giant dairy co-operative Fonterra has lifted its forecast range for the milk price for farmers this season and says the price now could be as high as $7.55 per kilogram of milk solids.
The Advance Rate Fonterra pays its farmer owners will be set off the mid-point, $7.05 per kgMS, of the revised range.
The announcement from Fonterra on Tuesday comes amid growing expectations that the milk price this season will hit its highest level since 2014, when there was a bumper return of $8.40.
Fonterra has recently started forecasting its milk price with a broad range – as opposed to stating one figure as was the previous custom.
And it has retained in its latest forecast a broad $1-wide range.
The range now is $6.55 to $7.55, up from the season-opening forecast of $6.25 to $7.25.
This will be a very welcome boost for farmers who have had some lean years since that 2014 jackpot and have watched their co-operative plunge into all sorts of struggles, most recently announcing a loss of $605 million for the year to July.
Fonterra Chairman John Monaghan says the co-op has been achieving good prices for its milk so far this season.
“Demand for whole milk powder (WMP) has been firm, and for the full season we’re expecting it to be above last year. Global WMP production is down year to date and expected to continue to decrease for the remainder of 2019.
“We are also continuing to sell our skim milk powder at higher prices than EU and US dairy companies in Global Dairy Trade (GDT) Events.”
Chief executive Miles Hurrell says there are positive signals for milk price.
“It is still very early in the season and a lot can change. There are a number of factors we are keeping a close eye on, which is why we’ve retained a wide forecast milk price range.
“These factors include global trade tensions and political instability in some of our key sales regions. And, as is always the case, we cannot predict the weather and clearly weather conditions play a big role in global supply.”
Hurrell says the strong demand for the co-op’s milk and the prices that are being achieved, relative to other milk producing regions, demonstrated the rationale of Fonterra’s new strategy to prioritise New Zealand milk.
“One of our four priorities is to support regional New Zealand. If you take the $7.05 mid-point of today’s revision to our forecast Farmgate Milk Price, it’s another $450 million into regional New Zealand.
“Our earnings outlook for FY20 is based on a forecast Farmgate Milk Price, which still falls within our new forecast range of $6.55 – $7.55 per kgMS. The mid-point of the revised range does mean our teams will need to continue to push hard to achieve our margins, but so far we’re comfortable with how this season is shaping up in terms of underlying business performance.”
The announcement on Tuesday by Fonterra has given more weight to growing expectations that the milk price could break above $7 for this season.
Economists with three of the four largest banks (ASB, BNZ, ANZ) have raised their picks to at or above the $7 mark, while Westpac, which raised its forecast last week, is sitting just below $7.
Global prices, after falling in the earlier months of the year, have stabilised – even though the volumes Fonterra is offering for sale have risen as the production season gets into full swing.
A strong milk price for the season will give the embattled Fonterra some much-needed breathing space.
While Fonterra has signalled it would look to return to paying a dividend this financial year, there’s still question marks over a number of its asset valuations, particularly in places like Australia and China. And there appears every likelihood that further write-downs, on top of the very chunky write-downs made in the past financial year, may yet be required.
Another recent positive development for Fonterra has been its hiring, in the newly created chief operating officer role, of current Mercury Energy chief executive Fraser Whineray. He starts with Fonterra early next year.