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.
“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.