At last a ray of sunlight into the country’s cowsheds: giant dairy co-op Fonterra has lifted its forecast farmgate milk price to $6.30-$6.60kg/MS, up from $6-$6.30, on the back of strong global demand.
The good news extends to next season, with ANZ economists predicting – because dairy commodity prices are improving more quickly than expected – the forecast for 2019-20 could go as high as $7.30kg/MS.
And there is something else Fonterra suppliers might get a bit of a glow from: the recognition by Fonterra’s top brass that the co-op has not been performing anywhere near where it should be. They’ll be looking for a sharp improvement, even if the co-op has a long way to go to match the achievements of smaller outfits like A2 Milk and Synlait.
It’s important for the country that Fonterra moves towards where it should be: a global leader in the dairy industry.
CEO Miles Hurrell, in saying the underlying performance of the business is not where it needed to be, nominates the Australian ingredients and foodservice businesses in wider Asia as the most pressing areas of concern.
“Since our Q1 business update, we have also felt the impact of difficult trading conditions in Latin America, mainly due to geopolitical situations in some countries. In addition, the increase in milk price, which is the primary cost input into our non-milk price products, has put pressure on the margins for those products, and they significantly contribute to our earnings.”
Fonterra has set a target of reducing debt by $800m this financial year. Hurrell said it was making good progress on its portfolio review and asset divestments, and was on track to meet targets for capital expenditure and operating expenses.
Chairman John Monaghan says the improved milk price forecast reflects the increases in global milk prices over the last quarter.
“Since our last milk price update in December, global demand has strengthened. This is driven predominantly by stronger demand from Asia, including Greater China. The European Union’s (EU) intervention stocks of Skim Milk Powder (SMP) have also now cleared for the season and, as a result, we expect demand for SMP to be strong.
“Global supply remains above last season’s levels, but growth has slowed due to challenging weather conditions in some of the world’s largest milk producing regions – in particular, Australia’s milk production is forecast to be down 5-7% on last season and the EU’s growth has slowed and is now forecast to be less than 1% up on last year.
“Here in NZ, due to hot, dry weather since the start of the year, we’ve revised our co-op’s forecast milk collections down from 1,550m kg/MS to 1,530m kg/MS. This is up 2% on last year.
“We’ve seen the positive impact of this supply-demand picture on a couple of fronts – the number of bidders and, more importantly, prices for the reference products that make up our milk price have increased over the last six GDT events. We expect demand to remain stronger relative to supply for the rest of the season.”
The full strategic review underway includes dividend policy. There will no interim dividend and its forecast earnings have been revised down to 15-25 cents per share.
A decision on any full-year dividend can only be made at the end of the financial year, and will depend on the co-op’s full year earnings and balance sheet position.
Monaghan says while the milk price is strong, the co-op’s earnings performance is “not satisfactory”. Interim results on March 20 would update progress.
“We are taking a close look at our business with our portfolio review, where we can win in the world, and the products and markets where we have a real competitive advantage. We need a fundamental change in direction if we are to deliver on our full potential”.
For just where that fundamental change in direction will take Fonterra, farmers will have to wait for further guidance. But those who have been critical of Fonterra’s performance in recent years will be cheered not only by the higher returns now promised, but by the signals the board is at last getting to grips with the challenges presented to it by its predecessors.