New Zealand has suffered several jolts in the past week, not least a higher interest rate regime as the Reserve Bank counters surging inflation. But at least one beacon of light shines through the gloom: the country’s leading primary export industry’s boom is moving to a second season of high prices.
Dairy giant Fonterra, which sets the pace for other dairy processors, has announced a record opening milk price payment for farmers next season amid expectations of continued strong demand for dairy products and constrained global supply.
The co-op expects to pay farmers between $8.25 and $9.75kg/MS for the season starting next month. The mid-point, on which farmers are paid, is $9 kg/MS.
That breaks the previous record set at this time last year, when Fonterra’s opening price for the current season was $7.25 – $8.75kg/MS, with a mid-point of $8kg/MS.
CEO Miles Hurrell said the opening forecast reflected continued demand for dairy, coupled with constrained global supply.
“The long-term outlook for dairy remains positive, despite recent geopolitical and Covid-19 related events impacting global demand in the short-term,” he said.
For the 2021/22 season, Fonterra maintained its 2021/22 forecast milk price of $9.10 – $9.50.
“At a midpoint of $9.30, this would be the highest forecast milk price in the co-op’s history and would see us contribute almost $14bn into the NZ economy through milk price payments,” he said.
Fonterra’s sales volumes have been down as a result of lower milk collections and the timing of sales due to short-term impacts on demand, including the lockdowns in China, the economic crisis in Sri Lanka and the Russia-Ukraine war.
But the opening forecast reflects continued demand for dairy, coupled with constrained global supply, Hurrell says.
“The long-term outlook for dairy remains positive, despite recent geopolitical and Covid-19 related events impacting global demand in the short-term,” he said.
Total group normalised EBIT of $825m were down $134m, reflecting lower sales volumes, continued pressure on margins from the significantly higher milk price, on-going Covid-19 disruptions, and the rapid decline of the Sri Lankan Rupee.
This was also reflected in Fonterra’s normalised profit after tax of $472m, down 20 %, the co-op said.
For the current financial year, Fonterra has retained its earnings per share guidance of 25-35c.
On the supply side, growth from key milk producing regions was expected to remain constrained as high feed, fertiliser and energy costs continued to impact production volumes.
These demand and supply dynamics are expected to support dairy prices in the medium to long-term.
Hurrell noted Fonterra’s normalised EBIT was down 17% to $317m, due to continued pressure on margins from the higher milk price, particularly in Foodservice, as well as the Covid-19 lockdowns.
Hurrell expected the impact of the lockdowns to show up in the fourth quarter results.
Just how the past season has progressed is evidenced in the fact Fonterra has raised its forecast for the season four times since then and reiterated it would remain at $9.10 and $9.50 per kgMS. The $9.30 per kgMS midpoint would be the highest milk payment since Fonterra was formed in 2001.
Point of Order 
Well, that is on;y going to contribute to higher inflation isn’t it ? It might be a bright spot for dairy farmers but not for the rest of the population.
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The only thing keeping NZs head above water is the income from growing things, particularly dairy. If that drops, we will have a rapid and deep recession, if not depression. Yet the government is going out of its way to make things difficult and more expensive for those industries. It is almost as if they want a poor ideologically pure country, rather than the one we used to have. Not ideal, but a lot better than most and certainly well ahead of the current models.
There seems to be no clarity as to what country we are emulating. Is it Venezuela, Zimbabwe or maybe just Argentina?
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