Cow bells will be ringing as dairy giant Fonterra gets on a financial roll

Dairy giant Fonterra is on a financial roll and it wants  to send  a  new wave of confidence through the country’s cowsheds.  It  upgraded its earnings guidance to 50 – 70c per share from 45 – 60c per share.  Contrast that  with the 20c it paid for the 2021-22 season.

At the same time, it  lowered and narrowed its forecast Farmgate Milk Price range of $8.50 – $10.00kg/MS to $8.50 – $9.50kg/MS, with a midpoint of $9.00 while holding its advance rate. It also reported a strong start to the 2023 financial year.

Fonterra CEO Miles Hurrell said it was a positive start to the year given the current global operating environment.

“We continue to feel the impact of geopolitical and macroeconomic events, with higher costs at every point in our supply chain. It’s a similar story behind the farm gate with our farmer shareholders managing significantly higher input costs”.

Fonterra’s final farmgate milk price for the 2021-22 season washed up at $9.30kg/MS, with total payable dividend 20c/share.  When reporting that earlier this year Fonterra had set the 2022-23 forecast milk price at $8.50-$10.00kg/MS, with a midpoint of $9.25.

In his latest announcement, Hurrell said globally, milk supply from key exporting regions is down over the last 12 months. Production in Europe and Australia continues to be down, with US milk supply showing a slight improvement in recent months. Here in NZ, our milk production is down 2.9% on the same point last season.

“Global market volatility has prompted some softening of demand for whole milk powder, particularly in Greater China and this is reflected in our forecast Farmgate Milk Price range. We’ve seen increased participation from other regions which has offset in part the drop in demand from Greater China. While it’s still early in the financial year, we are happy with our sales contract rate.”

Hurrell said the strong performance of the ingredients channel reflects continued favourable margins in the protein portfolio, particularly for  casein and caseinate products used in medical nutrition.

This is driving the increase in total group normalised EBIT, which is up 94% to $368m Normalised profit after tax is also up 84% to $214m and normalised earnings per share are 13c, compared with 7c  at the same point last year.

“The sustained strong margins in our protein portfolio give us the confidence to upgrade our earnings guidance, although the wider range reflects the volatility in the market which we expect to continue in the short to medium term. If these conditions continue for a further extended period, it could have an additional positive impact on forecast earnings.”

Performance in the Co-op’s Foodservice channel improved relative to the same period last year, but the high milk price is continuing to put significant pressure on margins in both the Foodservice and Consumer channels.

Hurrell said significant progress had been made on shipping the additional inventory held at financial year end. “As planned, inventory volume has returned to normal levels. Lower milk collections at the start of the season have also contributed to the reduced inventory levels.”

Hurrell said the Co-op was making good progress against its 2030 strategic ambitions.

“As we focus on our NZ milk pool, we’ve agreed the sale of our Chilean business. We continue to target a significant capital return for our farmer shareholders and unit holders.

“Sustainability is at the heart of everything we do. We recently released our Sustainable Finance Framework, which aligns our funding strategy with our sustainability ambitions.

“Together with Nestlé, we’re working on a NZ- first – the development of a commercially viable, Net Zero Carbon, dairy farm. Over the next five years, the partnership will examine all aspects of farm operations to identify opportunities for carbon reduction by using proven and future technologies to work towards its net zero carbon target. We’ve also signalled that we’re considering setting a target for scope 3 emissions.”

A strong united Co-op was  important for Fonterra’s shareholders, unit holders and New Zealand as a whole, Hurrell said.

Therefore the co-op is looking forward to implementing its Flexible Shareholding capital structure next year.

“Our Flexible Shareholding capital structure makes it easier for new farmers to join our Co-op, and for existing farmers to remain with our Co-op. This supports our strategy, to maintain a sustainable milk supply, protect farmer ownership and control, and support a stable balance sheet.”

Looking ahead, Hurrell said the long-term outlook for dairy remains strong.

“There’s no doubt that we’re in a period of increased global uncertainty. Inflationary pressures are being felt both on farm and across our business but looking further out, the fundamentals for dairy remain positive.”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.