Fonterra milk price forecasts give a fillip to farmers and the regions – the co-op has become an NZX favourite, too

Fonterra has  confirmed  what  most analysts  had  been predicting and lifted its 2020/21 forecast farmgate milk price range to  $7.30 – $7.90 kg/MS, up from  $6.90 – $7.50. This should  send a  further surge of  confidence  across  NZ’s  rural regions, hopefully in  a  wave  strong enough to encourage  farmers  to plan to  increase production  next  season.

As  a  result  of  the  higher  payout, the co-op  will be  pumping $11.5bn  into the  rural economy, well ahead of the $10bn predicted  last year. Although  farmer-suppliers  to Fonterra  are paid off   the mid-point  $7.60  of the new range, most analysts  believe the final payout will reach $7.90.

That  should  ensure a  handsome  return  for most  suppliers,  whose  cost  of  production averages  around $5.80-$6 kg/MS—and for the  highly  efficient, at below $4, an even   better one.

Not  all  milk processing  companies  are doing as  well as  Fonterra. Only  this week Synlait  had to downgrade  its profit guidance.

A2 Milk, for  which Synlait proccesses  infant  formula, has  three times  revised  downwards  its earnings prospects.

Meanwhile Fonterra’s  units, which give investors access to the co-op’s dividends, have  become  a  top performer on the NZX  in recent weeks.

Fonterra CEO Miles Hurrell says the lift in the 2020/21 forecast is a result of consistent strong demand for NZ dairy products.

GDT prices continued to increase since Fonterra previously updated its forecast in February and this week there was a 15% increase.

Hurrell said:

“It’s very much a China demand led story but there is also good demand across South East Asia and the Middle East.China’s strong economic recovery, following the initial impact of COVID-19, is flowing through to strong demand for dairy and we’ve seen this through sales during the Chinese New Year.

“China’s local milk supply is being used in fresh dairy products and they are looking to us to provide longer-life dairy products – in particular, whole milk powder which has a big influence on the forecast.Customers know we are continuing to get products to market, despite the challenges in the global supply chain and they are looking to us for this reliability. We’re also seeing customers want to buy more of our products than usual to help mitigate the risk of global supply chain delays.”

Hurrell says the lift in the  forecast is good news for farmers and the wellbeing of rural communities.

He  warns,  however, it is important that farmers recognise there are a number of downside risks to the mid-point of the range. For example, the EU and US are heading into their season and their milk supply will start increasing.

Other issues include the impacts of COVID-19 on key markets and market volatility.

Furthermore, a $7.60 forecast  increased Fonterra’ input costs putting further pressure on its earnings in the second half of the 2020/21 financial year. More details on those earnings will be provided with the half-year results on 17 March.

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