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."
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."
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