Tuesday, 11 December 2018 10:55

Global milk supply forces down milk price

Written by 
John Monaghan. John Monaghan.

Persistently strong global milk supply forced Fonterra to cut its milk price forecast last week by about 20-25 cents.

The season’s farmgate milk price range is now $6 - $6.30/kgMS — down from $6.25 - $6.50/kgMS. The co-op is maintaining its forecast earnings per share range of 25-35 cents. 

It also confirmed it is negotiating to take back full ownership of the Darnum plant in Australia and is looking at selling Tip Top, although it wants it to remain a New Zealand business.

Fonterra chairman John Monaghan says the revision is due to the global milk supply remaining stronger relative to demand, which has driven a downward trend on the Global Dairy Trade (GDT) index since May. 

“Since our October milk price update, production from Europe has flattened off the back of dry weather and rising feed costs. US milk volumes are still forecast to be up 1% for the year,” says Monaghan.

“Here in NZ we are maintaining our collections forecast of 1550 million kgMS. NIWA is saying it’s likely we will see an abnormal El Nino weather pattern over summer and this could impact our farmers’ milk production.

“Demand from China and Asia remains strong. However geopolitical disruption is impacting demand from countries that traditionally buy a lot of fat products from us.”

Fonterra chief executive Miles Hurrell says the latest forecast assumes demand will firm during the balance of the season, in line with predictions by other market commentators.

“Unknowns [persist] in the global demand and supply picture and we recommend farmers budget with ongoing caution. Fonterra’s advance rate has been set off a milk price of $6.15/kgMS.” 

Fonterra’s first quarter gross margin of $646 million is down $14m versus the same period last year and up slightly on a percentage basis from 16.6% to 17%. Revenue of $3.8 billion is down 4% and sales volumes were down 6% to 3.6b liquid milk equivalent (LME).

The co-op’s ingredients business, despite lower sales volumes, performed solidly during the first quarter with a gross margin of $273m, up $28m on last year. The consumer business also performed well with a gross margin of $310m, up $10m on last year and volumes were up 5%.

Hurrell says the co-op generally makes a smaller proportion of its total annual sales in the first quarter. “This means the results from the first quarter do not give much insight into earnings performance for the full year.”

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