Fonterra sets opening Farmgate Milk Price forecast and updates business performance

By Jim Cornall

- Last updated on GMT

Fonterra has narrowed its 2020/21 forecast Farmgate Milk Price range.  Pic: Fonterra
Fonterra has narrowed its 2020/21 forecast Farmgate Milk Price range. Pic: Fonterra

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Fonterra has announced an opening forecast Farmgate Milk Price range for the 2021/22 season of NZ$7.25 to NZ$8.75 per kgMS (US$5.29 to US$6.38), with a midpoint of NZ$8 per kgMS (US$5.84).

It also narrowed its 2020/21 forecast Farmgate Milk Price range, which reduces the midpoint by 5 cents to NZ$7.55 per kgMS (US$5.51), and reported a strong performance for the nine months ending April 30, 2021. However, it said there will be significant pressure on earnings in the last quarter due to the normal seasonal profile of the business combined with tightening margins. 

CEO Miles Hurrell said the improving global economic environment and strong demand for dairy, relative to supply, are sitting behind the coop’s NZ$8 midpoint.

“Global demand for dairy, especially New Zealand dairy, is continuing to grow. China is leading the charge as its economy continues to recover strongly. Prompted by Covid-19, people are seeking the health benefits of milk and customers are wanting to secure their supply of New Zealand dairy products and ingredients,”​ Hurrell said.

“Growth in global milk supply seems muted and the global supply of whole milk powder is looking constrained. Based on these supply and demand dynamics, along with where the NZ dollar is sitting relative to the US dollar, we’re expecting whole milk prices to remain at current levels for the near future.

“As we look out over the next 18 months, there are a number of risks, which is why at this early stage we have this large range on our forecast Farmgate Milk Price. Some of the major risks include: COVID-19, which is far from over; the impacts of governments winding back their economic stimulus packages; foreign exchange volatility; changes in the supply and demand patterns that can enter dairy markets when prices are high; and as always, potential impacts of any geopolitical issues around the world.”

Hurrell said at the mid-point of NZ$7.55, 2020/21 would be the second year in a row with the forecast Farmgate Milk Price above NZ$7 per kgMS (US$5.11).

“Since March, we have seen prices settle, somewhat, which is why we have revised our midpoint down 5 cents. In that extraordinary March GDT event, where prices jumped 15% and which contributed to the increase in our forecast 2020/21 Farmgate Milk Price range, the average price for whole milk powder was over US$4,350 per metric tonne. In the last three GDT events, however, the average price has reduced to close to $4,100 per metric tonne. And GDT butter prices have gone from almost $6,000 per metric tonne to below $5,000 per metric tonne for the first time since January.”  

For the nine months ending April 30, 2021, Fonterra delivered a normalized Net Profit After Tax of NZ$587m (US$428m), up 61% year-on-year. Reported Net Profit After Tax was NZ$603m (US$440m), up 2%. 

Fonterra’s Total Group normalized Earnings Before Interest and Tax (normalized EBIT) was up 18% to NZ$959m (US$700m), due to higher margins and reduced operating expenditure. 

“Greater China continues to be an important performer for us, delivering year-to-date normalized EBIT of NZ$457m (US$333m), up 30% or NZ$106m (US$77m) year-on-year. Foodservice, once again, was the big driver behind this result, contributing NZ$93m (US$68m) of the growth. In the third quarter, the team continued to improve the strong gross margins we saw in Foodservice at half year by shifting milk into higher value products, for example cream cheese. As a result, the year-to-date margin increased from 21.5% to 28.6%,”​ Hurrell said. 

“Asia Pacific’s normalized EBIT of NZ$224m (US$163m) was down 10%. While Consumer improved by 29% and Foodservice by 89%, this was offset by Ingredients which was impacted by pricing lags on sales contracts with customers, delaying our ability to pass through the increase in our input costs.

“AMENA’s normalized EBIT of NZ$322m (US$235m) was down by 11% or NZ$40m (US$29m), mainly due to lower Ingredients sales volumes as we continue to make the most of one of our strengths and that is our ability to move milk into higher value products and markets. However, AMENA Consumer and Foodservice continue to perform well, maintaining a year-on-year improvement in gross margins.”

Hurrell says the coop’s operating expenses are down 5% year-to-date but there are plans for 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 NZ$69m (US$50m) for the nine months ending April 30, 2021.”  

Fonterra said it is maintaining its normalized earnings guidance of 25-35 cents per share. While year-to-date normalized earnings per share are 34 cents, the coop is expecting earnings in the fourth quarter to come under further pressure and is providing guidance that its full year earnings are expected to be more towards the mid-point of the range.

Hurrell says there are some clouds on the horizon. 

“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.

“As a result, we’re forecasting increased pressure on margins in the fourth quarter. This is compounded by the normal seasonal profile of our business, where we have our 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.”

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