Fonterra’s Hurrell notes improving economies

Fonterra 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 (€4.77) midpoint of its 2021/22 forecast farmgate milk price range. However, he warns that there are still risks over the next 18 months for world economies.

“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.

“At this point the farmgate price would see the co-op contributing more than $12 billion (€7.2bn) to the New Zealand economy next season.

“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.”

Its opening forecast farmgate milk price range for the 2021/22 season is $7.25 – $8.75 per kgMS, with a midpoint of $8 per kgMS.

Fonterra also narrowed its 2020/21 forecast farmgate milk price range, which reduces the midpoint by five cents to $7.55 per kgMS, and reported a strong performance for the nine months ending 30 April 2021. However, Fonterra 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.

“Since March, we have seen prices settle, somewhat, which is why we have revised our midpoint down five cents,” Hurrell adds. “In that extraordinary March GDT event, where prices jumped 15% and which contributed to the increase in our forecast 2020/21 farmgate milk price range, the average price for whole milk powder was over US$4,350 per metric tonne. In the last three GDT events, however, the average price has reduced to close to $4,100 per metric tonne. And GDT butter prices have gone from almost $6,000 per metric tonne to below $5,000 per metric tonne for the first time since January.”

On the business side, Hurrell says Covid-19 challenges are still very much part of life for the co-op’s employees and customers around the world. “It’s too easy to forget this if you’re sitting here in New Zealand – but today’s results show that despite these challenges we’ve lifted our financial performance. Over the last three months, we have also committed to getting out of coal by 2037 and made some promising progress in a trial using seaweed in cows’ feed to reduce emissions.

“Greater China continues to be an important performer for us, delivering year-to-date normalised EBIT of $457 million, up 30% or $106 million year-on-year. Foodservice, once again, was the big driver behind this result, contributing $93 million of the growth. In the third quarter, the team continued to improve the strong gross margins we saw in Foodservice at half year by shifting milk into higher value products, for example cream cheese. As a result, the year-to-date margin increased from 21.5% to 28.6%.”

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