In a timely boost to the rural regions, Fonterra has raised its forecast milk payment to farmers for this season to match its previous record high of 8.45kg/MS, as demand for dairy holds up while supply tightens.
The giant co-operative lifted and narrowed its forecast farmgate milk price range for the 2021/22 season to between $7.90 and $8.90kg/MS from the initial $7.25 to $8.75 kgMS.
The midpoint of the range on which farmers are paid increased to $8.40 kg/MS, from $8 last season. That would match the previous record, paid in the 2013/14 season, and would result in almost $13bn flowing into regional New Zealand.
The country is heading into its peak milk production period in late spring and output so far is below last season, constrained by poor weather and limits on expansion. Milk production is also soft elsewhere, because of poor weather and high feed costs.
At the same time, demand is holding up and Fonterra is looking to move more of its milk into higher-value products, boosting profitability.
“We have seen demand from China ease over the past couple of months, while other regions have stepped in to keep demand firm,” Fonterra chief executive Miles Hurrell said.
“On the supply side, overall global milk supply growth is forecast to track below average levels, driven by a slowdown in US production due to the increased cost of feed.
“These supply and demand dynamics are supporting the current pricing levels, and a higher contract rate has given us the ability to narrow the forecast range.”
Still, higher milk prices, while beneficial for farmers, can squeeze profit margins for milk processors like Fonterra unless they can sell their products at higher prices.
Hurrell said that while the increase in milk price can put pressure on the co-operative’s input costs, Fonterra remains comfortable with its current 2021/22 earnings guidance range of 25-40 cents per share.
But he noted it was still early in the season and a lot could change.
Increased volatility was more likely when prices were high and that’s why the co-operative was maintained a range in its milk price forecast, he said.
The co-operative was keeping an eye on things that could impact the demand, including Covid-19, inflation pressures, exchange rate volatility and weather conditions as well as the effect of any geopolitical issues, he said.
Fonterra’s advance rate scheme spreads risk from fluctuating global dairy prices across the year by breaking up payments to farmers based on the forecast farmgate milk price. Without the scheme, the co-operative would require more equity.
By July 31 each year the co-operative has paid 85 per cent of the milk price forecast to suppliers. After the annual results are announced in September, a wash-up is done based on the actual results. Farmers receive three retrospective payments of 5 per cent each in August, September and October.
Point of Order recently noted that dairy farmers, as well as the processors, are being hit by higher costs. They will welcome the signal that Hurrell has got the house in order and moved to protect supplies with a price signal.