Fonterra farmers happy, unit holders not

It will have a big impact on the co-op’s farmers and on the rural economy, he says.

“While it is clearly a 15 months forecast, from what we’ve seen in the global marketplace – and also exchange rates are a key consideration – we have the confidence to announce $7/kgMS at this stage.

“The market is fundamentally in balance; we expect you will see demand and supply move around a little bit – that is the reality.”

Wilson says demand is expected to remain strong, especially from China and for butter and AMF (anhydrous milk fat). 

“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 1525 million 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.” 

Fonterra lifted its milk price this year from $6.55/kgMS to $6.75/kgMS “because of this continuing strengthening,” says Wilson.

Previously they thought there could be a weakening at this time of year, but the markets are in balance and the fat portfolio is strengthening. 

Commenting on what the higher forecast farmgate milk price means for the business, Wilson says the higher milk price is good news for farmers 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 already proving challenging due to the payment to Danone and the impairment of the co-op’s Beingmate investment.

“As a result, we are revising our forecast normalised 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.

“The business’ revised earnings forecast is disappointing for our shareholders and unit holders. However, the total forecast cash payout for farmers increases to $6.90 - $6.95 per kgMS, which is the third highest payout this decade.”

Wilson says this ongoing volatility is very frustrating for shareholders.

“There are two critical elements to it,” Wilson told Rural News. 

“One is the prices moving between our milk price products and our non-milk price products – whole milk powder, butter, skim milk powder and anhydrous milk fat, in particularly relative to cheeses, caseins and those products. 

“It is clear with WMP, butter and AMF being strong that goes to milk price rather than earnings.”

The second element is that prices of products that go into Fonterra’s food service business are staying a lot higher than historically. That decreases the margin in their business -- in their advance ingredients business, consumer and food service.

Fonterra chief executive Theo Spierings says the earnings challenge that comes with the higher milk price is compounded by the timing and size of this particular increase.

“There is always a natural lag in being able to pass through an increase in our input costs. But this increase has been rapid and late in the year, making it difficult for these higher costs to flow through into our sales for this financial year,” says Spierings. 

“Against this backdrop, we can see our sales margins are not where they need to be at this point in the year to achieve our original earnings forecast.”