Fonterra Shareholders Fund (NZX: FSF) Fonterra Provides Milk Price and Q3 Performance Update

Wednesday 26th May 2021

Fonterra today announced an opening forecast Farmgate Milk Price range for the 2021/22 season of $7.25 - $8.75 per kgMS, with a midpoint of $8 per kgMS.

It also narrowed its 2020/21 forecast Farmgate Milk Price range, which reduces the midpoint by 5 cents to $7.55 per kgMS, and reported a strong performance for the nine months ending 30 April 2021. However, it cautions there will be significant pressure on earnings in the last quarter of the year due to the normal seasonal profile of the business combined with tightening margins.

CEO Miles Hurrell says that the improving global economic environment and strong demand for dairy, relative to supply, are sitting behind the Co-op’s $8 midpoint of its 2021/22 forecast Farmgate Milk Price range.

“At this point it would see the Co-op contributing more than $12 billion to the New Zealand economy next season.

“Global demand for dairy, especially New Zealand dairy, is continuing to grow. China is leading the charge as its economy continues to recover strongly. Prompted by COVID-19, people are seeking the health benefits of milk and customers are wanting to secure their supply of New Zealand dairy products and ingredients.

“Growth in global milk supply seems muted and the global supply of whole milk powder is looking constrained.

“Based on these supply and demand dynamics, along with where the NZ dollar is sitting relative to the US dollar, we’re expecting whole milk prices to remain at current levels for the near future.

“As we look out over the next 18 months, there are a number of risks, which is why at this early stage we have this large range on our forecast Farmgate Milk Price. Some of the major risks include: COVID 19, which is far from over; the impacts of governments winding back their economic stimulus packages; foreign exchange volatility; changes in the supply and demand patterns that can enter dairy markets when prices are high; and as always, potential impacts of any geopolitical issues around the world.”

Having sold most of its milk for the 2020/21 season, Fonterra is now in a position to narrow this season’s forecast Farmgate Milk Price range from $7.30 - $7.90 per kgMS to $7.45 - $7.65 per kgMS.

Hurrell says, at a mid-point of $7.55, 2020/21 would be the second year in a row with the forecast Farmgate Milk Price above $7 per kgMS.

Earnings outlook

Fonterra is maintaining its normalised earnings guidance of 25-35 cents per share. While year-to-date normalised earnings per share are 34 cents, the Co-op is expecting earnings in the fourth quarter to come under further pressure and is providing guidance that its full year earnings are expected to be more towards the mid-point of the range.

Hurrell says there are some clouds on the horizon when it comes to Fonterra’s earnings performance.

“While overall we’ve seen stronger gross margins so far this year, they’ve narrowed in the third quarter as the increasing raw milk prices have flowed through to our input costs and the pricing lags on sales contracts with customers have delayed our ability to pass through the increase in our input costs.

“As a result, we’re forecasting increased pressure on margins in the fourth quarter. This is compounded by the normal seasonal profile of our business, where we have our ongoing fixed costs but lower volumes of milk being processed and sold. All of this means the fourth quarter will be challenging from an earnings perspective and we expect the margin pressure to continue into the first quarter of the 2022 financial year.”

Please see the links below for details

Fonterra updates on forecast Farmgate Milk Price and performance

Q3 Business Update

Source: Fonterra Shareholders Fund

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