High milk price lifts Fonterra's input costs

Last week the co-operative reported third quarter normalised earnings of 34c/share but is staying quiet about any plans for a dividend payment at the end of this financial year. At its half-year update, Fonterra announced an interim dividend of 5c/share.

Fonterra chief executive Miles Hurrell expects earnings in the fourth quarter to come under further pressure and full year earnings are expected to be more towards the mid-point of the range.

A high milk price means higher costs associated with producing value-added products for the co-ops.

Hurrell says there are some clouds on the horizon when it comes to Fonterra's earnings performance.

"While overall we've seen stronger gross margins so far this year, they've narrowed in the third quarter as the increasing raw milk prices have flowed through to our input costs, and the pricing lags on sales contracts with customers have delayed our ability to pass through the increase in our input costs," he says.

Fonterra is forecasting increased pressure on margins in the fourth quarter.

Hurrell says this is compounded by the normal seasonal profile of its business - ongoing fixed costs but lower volumes of milk being processed and sold.

"All of this means the fourth quarter will be challenging from an earnings perspective and we expect the margin pressure to continue into the first quarter of the 2022 financial year."

For nine months ending April 30, Fonterra delivered a normalised net profit after tax (NPAT) of $587 million, up 61% year-on-year.

Fonterra's China business has made another solid contribution to the co-operative's third quarter results.

For the nine months ending April 30, the Greater China business delivered normalised earnings before income tax of $457 million, up 30% compared to last year.

Foodservice, once again, was the big driver behind this result, contributing $93 million of the growth.

Hurrell says Greater China continues to be an important performer for the business.

The co-op's ongoing financial discipline is also a big part of its third quarter performance story, with operating expenses down 5% year-to-date.

However, Hurrell says it is planning some additional expenditure in the final quarter to support brands and product initiatives for next year.

"Our debt reduction over the last couple of years and lower interest rates have reduced our interest bill by $69 million for the nine months," he says.