Dairy price lift will give fillip to regional economies and fortify Fonterra’s confidence in pressing on with capital restructuring

Our  dairy provinces  are  reverberating to  the  news that prices  soared  at the  latest Fonterra GDT auction. The prosperity  this  brings  to the regions  will  provide a  significant counterbalance  to the loss  of earning power  in the tourism sector because of the pandemic.

The average price at the auction climbed 15% to $US4,231 a tonne but,  more  importantly, the price for wholemilk  powder, which is  the  key to the payout  to farmers,rose an astonishing 21% to $US4,364 a tonne. Butter  was  up  sharply to $US5,826 a tonne, or 13.7%.

Overall, the increase compares with a 3% rise at the previous auction two weeks ago.

The main dairy companies have recently narrowed their forecast payouts to farmers for the current season to above $7 per kilo of milk solids.

Dairy  prices   as  measured by the  GDT index are  now  at the  highest  for more than seven years, but are still  short of the 2012 peak.

At  the  latest auction  demand was  especially strong  from North Asia.

Even   though  the strong NZ dollar at current levels (some say it is over-valued)  penalises exporters, Fonterra  suppliers  will  be  expecting the  co-op  to   be  at the top end of  its  forecast payout range of $6.90-$7.50.

Farmers  will be  anticipating  some signal on that  when Fonterra  presents  its interim report  on March 17,  though  CEO  Miles  Hurrell  did warn  last  month  that with dairy prices  rising  through the first half of  the season  it will put  pressure on the  co-op’s  sales margins in the  second half  of  its year.

On  the  other hand  it  has   been a  good  production  season in most regions and   morale in the  industry  has  been  rising  as  the  shabby criticism  of  “dirty dairying”  levelled  at  the  industry  has  been moderated  by evidence it  leads  the  world  in being  the  most sustainable, with the  lowest emissions.

Fonterra  is  doing its  bit to  reward farmers with the  most  sustainable  practices  by  indicating that from June 1 up to 10c of  each farmer’s payment  will be  determined   by  the  sustainable credentials .

Looking   to  the  longer term, if the  latest prices   hold  up, the  case can  be  made   that  the  dairy  industry, far  from being  told  to  cut  back   cow  numbers  as the Climate  Change  Commission  is demanding,  should  be  encouraged  by  the  government  to  increase  production  as  well as  to become  more sustainable, with less emissions.

 Fonterra – which after  two  years  of  steep losses  returned  to the  black last year – more immediately can move  ahead  confidently   on  the  review  it has  undertaken of  its  capital  structure.  It  is  still  in the process  of  unloading  some  of  its  assets  acquired in the  era  of  its previous management   and has repaid  substantial debt   but there  is  more to  do  on that front. Whether  it  can refine  its capital  structure  is a moot  point, since  each  of its  10,000 farmer-shareholders  has   an opinion on that.  There   is  little  doubt  however  a  more  efficient  capital  structure  could  be devised  as  chairman Peter McBride showed  previously   in  his  earlier role  with Zespri.

It  still  has  difficult  decisions  on how to  transition  away  from fossil  fuels  at  its processing  plants  and –   importantly –  to  drive  ahead with  its focus  on new   value-added  products   that  command  premium prices.

2 thoughts on “Dairy price lift will give fillip to regional economies and fortify Fonterra’s confidence in pressing on with capital restructuring

  1. We won’t have it all to ourselves for very long. There will be other suppliers (much larger than us) from other
    countries that will not be able to resist these prices. We need to maximise this opportunity with some smart action.

    Like

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