Dairy farmers had some Xmas cheer this week, as dairy giant Fonterra told them the forecast payout would be the fourth-highest-ever, at the mid-point of its farmgate milk price range.
The $7.30kg/ms means the cash payout for the season will reach $11.2bn, a rise of about $400m from the earlier forecast.
There could even be a clap from the cowsheds for the new bosses of Fonterra who are turning around the co-op’s financial performance, as they apply a back-to-basics approach to recovering from last year’s horrendous $605m loss. The first quarter of the new financial year has gone well.
Fonterra’s recovery is vital for not just the rural communities it serves, but for the country as a whole.
And dairy farmers, facing the burden of extra costs in carrying the Labour-led coalition’s determination to achieve a world first with the imposition of a charge for methane emissions, will gain some relief if Fonterra can sustain, and even improve, on its current performance. They will be hoping Fonterra can still hit the top of its payout range, at $7.60kg/ms.
It would underline once more how the dairy industry is (in the old, but still relevant, cliché) the “backbone” of the economy.
Besides facing government demands on the industry over methane emissions, dairy farmers are confronted with stringent freshwater regulation and there’s the prospect that bank managers will be hounding them as the Reserve Bank tightens the capital reserve regime.
Fonterra CEO Miles Hurrell makes no bones about the herculean task the co-op is engaged in. He reports the focus is still on reducing debt, so it is no more than 3.75 times earnings.
“This will require us to achieve a gross margin of $3bn, further reduce operating expenditure, lower capital expenditure by $100m to $500m, and also divest some more assets”.
Hurrell makes these points:
“So far this year we have:
” * Improved the underlying financial performance of the business, delivering a gross margin of $740m, up from $646m;
” * Continued the focus on financial discipline, reducing operating expenditure by $104m and managing capital expenditure carefully;
” * Generated a normalised EBIT of $171m, up $145m,
” * Improved free cash flow by $595m compared with last year.”
He does leaven the good cheer with a note of caution. The biggest pressure on earnings is going to be the rising milk price. Stronger-than-forecast performance from the food-service business has helped offset the higher milk price to date.
Hurrell says the co-op will need to be very focused around making improvements in other areas too. And he sees some markets that have difficult trading conditions, currently among them Chile and Hong Kong where the ongoing civil unrest is impacting sales.
Fonterra’s normalised earnings guidance for the 2020 financial year remains at 15-25c per share.
Fonterra Chairman John Monaghan says the co-op’s higher milk price reflects a global dairy market that is tipped slightly in favour of demand.
“Our NZ milk production is forecast to be up 0.5% on last year. Annual milk production in the other key global supply regions of the US and EU are both growing at less than 1%.On the demand side, Global Dairy Trade prices have increased by about 6% since our previous forecast. WMP prices, a key driver of our milk price, have hit their highest level since December 2016.At this stage of the year, we have contracted a good proportion of our sales book and that gives us the confidence to increase the mid-point of our forecast Farmgate Milk Price range by 25c”.