Fonterra announces strong opening farmgate forecast, lowers earnings estimate

Fonterra chairman John Wilson says the global supply and demand picture is positive for farmers.

Fonterra has announced an opening forecast farmgate milk price of $7/kg of milk solids for the 2018/19 season.

The figure is one of its highest opening forecasts on record and one chairman John Wilson puts down to positive global demand and supply dynamics.

Fonterra also increased its 2017/18 forecast farmgate milk price by 20c to $6.75/kg of milk solids.

However, while this was good news for farmers still recovering after the two years of lower milk prices in 2015 and 2016, the higher milk price puts pressure on Fonterra’s earnings, which are already suffering from its Danone settlement and Beingmate impairment announced in February.

Because of that Fonterra has revised its forecast normalised earnings per share guidance range down to 25-30 cents a share (from 35-45c) and its forecast dividend range for the full year down to 15-20 cents a share (from 25-35c).

“Global dairy prices have risen since the start of the season. The price of whole milk powder is particularly strong due to continued growth in demand from China and across Asia,” chairman John Wilson says.

“The business’ revised earnings forecast is disappointing for our shareholders and unitholders. However, the total forecast cash payout for farmers increases to $6.90-6.95 per kgMS which is the third highest payout this decade.”

Outgoing chief executive Theo Spierings says the earnings challenge that comes with the higher milk price is compounded by the timing and significance of this particular increase.

“There is always a natural lag in being able to pass through an increase in our input costs. But this increase has been both rapid and late in the year, making it difficult for these higher costs to flow through into our sales for this financial year. 

“Against this backdrop, we can see our sales margins are not where they need to be at this point in the year to achieve our original earnings forecast.”

Units in Fonterra's Shareholders' Fund fell 26c or 4.53% to $5.48 on the NZX following the announcement. 

The units - which give outside investors access to the dairy giant's dividend payments - debuted on the NZX at $6.66 back in 2012.

Devon Funds analyst Slade Robertson says its important to remember that higher milk prices are not a good thing for unitholder returns.    

"The strong milk price (and higher payout) is great news for farmers, but means higher cost of goods sold, and thus lower profits for the business."

Payout surprise

Fonterra's higher forecast for the current season surprised Westpac senior economist Anne Boniface, who also noted Fonterra expects next season’s milk collections to be 1.5% higher on the current season.

The co-op says it expects New Zealand 2018/19 milk collections to be 1,525 million kgMS, and us expecting a lift in supply from the EU, US, Australia and Argentina.

Fonterra also had an optimistic view of demand for the forthcoming season, particularly from China and Asia, she says. 

"We’re not quite so optimistic that the recent pace of growth in demand from China will be sustained in the face of an expected noticeable slowing in the Chinese economy.  

"Consequently, we are a bit more circumspect on the outlook for the milk price for next season, with a $6.40 milk price pencilled in. It remains early in the season, and we will be watching with interest how milk prices track in the coming months."  


15 · Got a question about this story? Leave it in Comments & Questions below.


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15 Comments & Questions

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15 years on no real value add other than rhetoric (also were behind when started as that was an argument for the monopoly)

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Fonterra under Wilson and Theo has been a nightmare
Wilson needs to follow Theo

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No real detail given so all nice & vague

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Non farmer shareholders milked again for the benefit of overpaid head office staff and farmers. If this was a marriage Fonterra would be found guilty of abuse! The only alternative left to abused FSF holders is to withdraw their capital by selling and never providing money again to a fat, lazy and inefficient Fonterra

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The tide is more out than in on this one. FSF investors had NO idea of how the milk price worked when they bought (I know this as fact). It’s taken them 5 years to figure this out.

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Why the surprise, it's pretty much normal business practice these days to feather their own caps, so to speak.

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As the commodity price increases, the raw input cost for the added value goes up accordingly and therefore the profit goes down. This was never a secret and all investors who did due diligence would understand this correlation.
If you want to hedge your bets (like a dairy farmer does), buy a dairy farm, there are some going cheap at present.

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MBA words to describe moving wallet from right to left pocket
Cheap - catch a falling knife re self disruptive risk

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But if you have true value add products and commodity input price rises your sales price rises.....when oil costs go up petrol prices go up.

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Market buyer sees no VA - just fancy bags on what are all now commodities

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Don't let the facts get in the way of the PR .....also because we are VA etc we should be paid more.

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I trust Fonterra will put aside a few $100 million to cover the cost of fixing the Microplama Bovis issues largely created by their farmer/share-milking members that have not complied with NAIT labeling requirements

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It would be interesting to see if it's been getting spread around the place by people with a vested interest to see farming wiped-out in this country.

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The only ones that have benefitted over the last 15 years from the creation of Fonterra are the ones pulling in absolutely ludicrous salaries at the top end, which have increased every year without cessation.

Meanwhile, the share price has tanked since IPO, revenues and payouts over that time period have pretty much flat-lined, terrible investment decisions and massive write-downs made, and the shafting of farmers via such strategies as the 90-day invoicing scandal.

I guess you have to pay bloated salaries and golden parachutes like Theo's somehow, eh?

Hey NBR, do you mind posting up a comparison of farmer payouts and CEO salary? Comparison of these 2 is really stark, and words don't do them justice...

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The last time they opened so bullish the price dropped >3.50 in 7 months.

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