Thursday, December 7, 2023

Fonterra delivers cream on a steady milk price

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But farmers will be nervous about downward trend in milk prices.
Fonterra chief executive Miles Hurrell says fertiliser prices are coming off their highs and maybe the OCR has reached a peak, according to the Reserve Bank governor.
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Fonterra has produced sizzling third-quarter financial results while keeping farmgate milk price expectations on the simmer for this season and the next.

Farmer-shareholders and unit investors will be counting their cash dividends to come – 60c a share capital repayment in August and perhaps another 40c after the end-of-year financials are announced in September.

But farmers will be nervous about the current downward trend in milk prices, given the uphill gallop of input costs and interest repayments.

The new season will begin in one week with an $8/kg mid-point forecast, down 20c from the old season and down $1.30 from 2021-22.

On the plus side, Fonterra has increased by 30c the new Advance Payment Rates, which will begin at $6 for the first seven months of the season.

This will be 75% of the mid-point of the forecast range, compared with 60-65% historically.

CEO Miles Hurrell said the strength of Fonterra’s balance sheet enables it to get more cash to farmers earlier, to help with the rising tide of costs.

The balance sheet is in a very strong position, incorporating the proceeds from the sale of Soprole, enabling the capital return of $800 million to be brought forward to August.

Regarding the market outlook, Hurrell said the new milk price forecast reflects gradually rising demand for whole milk powder in China as its economy continues to recover from covid.

“However, the timing and extent of this remains uncertain, with China’s in-market whole milk

powder stocks estimated to be above normal levels following increased domestic production.

“This is reflected in our wide opening forecast range for the season.”

Coming up on five years as CEO, Hurrell has delivered on the big measurable financial targets set in Fonterra’s change of strategy following financial losses in 2018-19.

The targets were an average farmgate milk price between $6.50 and $7.50; return on capital 9% to 10%, debt gearing down to 33%, dividends of 40-45c a share and 50% increase in operating profit.

He expressed personal satisfaction that most of the goals have been met and said a renewed

strategy will be published later this year.

“But the price relativities between protein products and milk powders are a great help and we would assume those will even themselves out.”

Fonterra is well aware that farm costs are up considerably and that an $8 milk price in some cases may be below break-even, Hurrell said.

But “fertiliser prices are coming off their highs and maybe the OCR [official cash rate] has reached a peak, according to the Reserve Bank governor”.

Milk collection to the end of April was 1405 million kg milksolids, only a whisker below the tally for the same period in the previous season.

April itself saw a 7% increase, month on month, according to figures from the Dairy Companies

Association of New Zealand.

Hurrell paid tribute to farmers in many parts of the country where storm impacts, drought and excessive rainfall played havoc.

“Overall milk production has been okay, but we shouldn’t lose sight of the fact that it has been tough on groups of farmers,” he said.

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