Dairy prices are rising again but the movement of Fonterra share prices (not so cheery for farmers) prompts buyback plans

New Zealand’s  dairy   farmers, who  will be  receiving  a  record  payout from  most of  the processing  companies  they have  supplied in the 2021-22 season,  will be  relieved that the  average price rose  again at the latest Fonterra auction, snapping five consecutive falls.

While  demand  from the  China  market  remained relatively weak, other regions stepped in to take up the slack. The GDT price index rose 1.5% to 1359 (the first increase since the March 1 auction when the index hit a record 1593}, a  level  well  above  recent  seasons.

Covid-19 lockdowns in China have disrupted supply chains and weighed on dairy markets, with North Asian buyers recording their fourth-smallest volume of whole milk powder at the latest auction.

NZX dairy insights manager Stuart Davison said South-east Asia took the largest volume of both milk powders, purchasing well over half the total whole milk powder sold, which was the biggest proportion of all, while also purchasing the largest volume of skim milk powder.

“European Union buyers bought a significant volume of skim milk powder at this auction, almost three times more skim milk powder than at the previous auction, and a massive volume for European Union buyers on the GDT auction.”

Davison said while a similar number of North Asian buyers secured winning bids as usual, it was for significantly less volume, which he said wasn’t surprising.

South-east Asian and Middle Eastern buyers increased their purchase volumes, but African buyers bought only a small volume of butter, he said.

“Overall, it would seem that dairy commodity prices have bounced, and the market is ready to push higher again; even with a lack of purchase volumes from Oceania’s biggest market,” Davison said.

The whole milk powder price index slipped 0.3% as a decline in the three later dated contracts outweighed gains in the two closest contracts. The average price increased 5.7% to US$4158 (NZ$6272) a tonne.

Davison said whole milk powder prices had fallen back into alignment, with instant and UHT powder regaining their premium over regular powder.

Butter gained 5.6% to $6068t, skim milk powder 3% to $4240t  while  cheddar fell 3.6% to $5365t.

Meanwhile, back on home territory, Fonterra said  it  plans to spend  up to $50m to an on-market  buyback of its own shares beginning on 30 June.

Chairman Peter McBride says that in making this decision, Fonterra has looked at prevailing prices in the Fonterra Shareholders Market (FSM) alongside the Co-op’s strategy and overall business performance.

There  has  been a  steep  fall in  the  value of  the  shares,  which  can only  be held  by  farmers.

“The co-op considers the prevailing price particularly since late April has undervalued Fonterra shares, which is a key reason for announcing this buy-back,” says  McBride.

The buyback programme will be made under section 65 of the Companies Act and may run for up to 12 months. This programme is separate to the allocation of up to $300m Fonterra announced last year to support liquidity in the FSM as farmer shareholders transition to the Flexible Shareholding capital structure, through an on-market buyback (Transitional Buyback) and other tools such as the market-making arrangements.

McBride notes that Fonterra is preparing to implement the Flexible Shareholding structure as soon as possible but has not yet set a date for when it will be effective. In April, the Government announced its support for the structure and has signalled that it expects the amendments to progress through Parliament this year.