Fonterra lifts milk payout forecast to record level – but farmers will be soured if govt demands their herds be culled

Dairy  giant Fonterra has lifted its 2021/22 forecast farmgate milk price range to $9.30 – $9.90kg/MS, up from its previous forecast of $8.90 – $9.50.

This increases the midpoint of the range, at which farmers are paid, by 40c to $9.60 – easily the highest on record.

At that level, Fonterra estimates that the milk price  payout will contribute $14bn this season to the NZ economy.

Truly  exciting times for the dairy industry and  rural regions.  They  have  become  even more  important, as a  key prop to the economy  through the Covid pandemic, because of the  loss of  earnings from the international tourism  and  hospitality industries.

Fonterra is  performing  brilliantly under CEO Miles Hurrell, not  just in boosting  the co-op’s achievement of  a  record  payout, but  in turning  its  own finances  around after problems left by  the previous  administration.  Moreover it is exploiting technical  advances –  in  the  tanker fleet, for example, the first e-tanker  has  hit the road.

The big  hope  now is that  this year’s level of payout  can  be  sustained  next season,  something that has  seldom  been achieved  in Fonterra’s  chequered  history.

But the  big issue  facing  the dairy industry  is  whether  the  government will impose new  rules on  cow  numbers to meet  its climate  change goals. Cow  herds  are  among NZ’s  biggest source  of  methane emissions.

Critics  say  the  government  would  be  delivering a  double whammy  not  just to  the  industry  and the  economy but  also to itself, if  it takes steps  to reduce  cow  numbers.

Fonterra  is pumping $14bn  into the pockets of  its  suppliers.  But it  comprises  only 80% of the industry.

Hurrell says  the the lift in the forecast reflected the increase in global dairy prices since the co-op’s last milk price update in January and good levels of ongoing global demand for dairy.

Since Fonterra’s last revision of the milk price in January, WMP prices on the Global Dairy Trade platform have increased by 10.3% while skim milk powder has increased by 8.4%. Both products are key drivers of Fonterra’s milk price.

“Global demand for dairy remains firm, while global milk supply growth continues to track below average levels. These demand and supply dynamics are supporting the increase in prices,” Hurrell said.

“Milk production in the EU and US continues to be impacted by the high cost of feed and this is not expected to change in the coming months.”

At home, ongoing challenging weather conditions have continued to impact grass growing conditions.

As a result, the co-op revised its 2021/22 NZ milk collections forecast to 1480m kg/MS, down 3.8%  compared with last season.

“This reduction in supply reinforces our strategic focus on ensuring our milk is going into the highest value products,” he said.

Down  on  the  farm,  the  rise  in the  payout  will hopefully  leave  a satisfactory margin after  rising costs on farm are met, including from inflation and rising interest rates.

Analysis by Statistics New Zealand shows a number of key farm inputs have experienced significant inflation pressure over the past two years.  Electricity costs, for example, are up 21%, while stock grazing costs are up 36.9%.

The Reserve Bank on Wednesday raised the benchmark interest rate and signalled interest rates would now be steadily ratcheted up.

Hurrell says while the higher forecast Farmgate Milk Price puts pressure on the co-op’s margins in Consumer and Foodservice, prices in its ingredients business remain favourable for milk price and earnings at this stage.

“As a result, our current 2021/22 earnings guidance of 25-35 cents per share remains unchanged.”

3 thoughts on “Fonterra lifts milk payout forecast to record level – but farmers will be soured if govt demands their herds be culled

  1. The government needs to keep their sticky fingers away from the rural sector. It’s the only thing they haven’t been able to screw up under the pretext of covid. Keep the commie greens away too.

    Like

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