Farmers start new dairy season on an encouraging note as Fonterra signals another record milk price

New  Zealand’s  dairy  industry, which is  proving  again it is  the  backbone of  the  country’s  export industries, has  been  given  fresh encouragement with the big  co-op Fonterra signalling  a  record  milk price for  the  season  that  has  just  opened.

It  comes  as the  payout  for  the  just-finished  season  stands  as  the  highest  since  the  co-op  was  formed in 2001.

So although farmers have  made  decisions for  this  season on  the  number  of  cows  they  are  milking,  they  have the  incentive  to go  hard on production  levels,  despite the  pressure  from  higher  costs  and worries  over climate changes measures, including  projected charges on emissions.

Fonterra’s buoyant  forecast contrasts with  a recent  report  by agribusiness banking specialist Rabobank  which  said that despite global milk production looking set to decrease for the fourth consecutive quarter in Q2 2022, weakening global demand is expected to create a scenario that will see moderate price declines in dairy commodities during the second half of the year.

In lifting the forecast  so  early  in the  season, Fonterra’s  CEO  Miles  Hurrell said “a series of global events” had changed some of the assumptions on which Fonterra’s aspirations were based on.

“In particular, interest rates and inflation have lifted well above our assumptions, as have commodity prices in response to the continued strong demand for dairy. This feeds into the farmgate milk price expectations, which can  be seen in our updated forecast of the 2022/23 milk price range”.

The  range  of  the new  forecast is   between $8.75 and $10.25kg/MS, with  a midpoint of $9.50,  up 50c.

The final price for the season that finished in May hasn’t been settled yet, but is likely to be around $9.30, which is the ‘midpoint’ price of Fonterra’s most recent forecast of $9.10-$9.50. Wherever it ends up it will be a record, since the previous best was $8.40 for the 2013-14 season.

Hurrell  says while the co-op is in the position to be forecasting both solid earnings and a healthy milk price for the next year, significant volatility remains. The near-term headwinds have the potential to impact some of the co-op’s targets.

Hurrell said  input cost increases are impacting the cost of its debt in the short term and have also raised on-farm costs. This, in combination with ongoing regulatory changes, will potentially reduce milk supply volumes.   As the higher milk prices lift working capital, the overall debt position has the potential to trend higher but still within current debt parameters.

“What happens beyond next year is considerably less certain, with a wide range of possible outcomes. As a result, the indicative markers for future financial years which are set out in the co-op’s long-term aspirations will be updated closer to the time,” Hurrell said.

He  added Fonterra would provide earnings guidance for 2023-24 at the end of the 2022-23 financial year and at the same point in future financial years.

Fonterra announced earnings guidance of 30-45 cents per share for the 2022/23 financial year which starts in August. That’s ahead of its forecast range for this financial year of 25-35c.

“As we look out to 2030, the fundamentals of dairy – in particular, New Zealand dairy – look strong and we continue to make good progress against our long-term aspirations,” Hurrell said. “Our ambitions are to grow the value we derive from our New Zealand milk through our sustainability credentials, innovation, and nutrition science.”

To help drive the strategy, Fonterra has named the head of its high-value ingredients business Active Living, Komal Mistry-Mehta, to the new role of chief innovation and brand officer. It will also appoint a new managing director of strategy and optimisation to ensure milk went into the highest value products.

The co-operative’s Africa, Middle East, Europe, North Asia, Americas regional chief executive Kelvin Wickham is leaving the business after 34 years as Fonterra divests its businesses in Chile and Brazil and exited Russia.

The region would be consolidated with the Asia Pacific region, led by Judith Swales.

Sources  within  the  industry are  expecting Fonterra  will  announce  soon  that  it has  succeeded  selling  its  shareholding  in  the  big Chilean  dairy   business Soprole.

Fonterra announced earnings guidance of 30-45 cents per share for the 2022/23 financial year which starts in August. That’s ahead of its forecast range for this financial year of 25-35c.