Friday, March 29, 2024

New milk price is conservative

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An unexpected jump in milk payout forecast for this season to a more encouraging $4.60/kg of milksolids was the centrepiece of Fonterra’s annual results presentation for the 2015 financial year.
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After only three consecutive price rises in fortnightly GlobalDairyTrade auctions Fonterra was emboldened to increase its forecast by 75c or 20% from the dismal $3.85, the record low it sunk to in early August.

Such a quick reflection of price optimism when the season was still young would be welcomed by farm owners, sharemilkers, staff members and rural suppliers as signalling the worst of the price slump was over.

But Federated Farmers dairy section vice-chairman Chris Lewis was quick to point out farmers needed another dollar added to the milk price to get back to break-even.

It also implied Fonterra was making forward sales through normal channels aside from the GDT platform with improving returns.

With the announcements Fonterra changed the milk production forecast from minus 2% to a more than 5% reduction this season, which would help boost prices further.

"We have seen a significant lift earlier than we had anticipated but we are still taking a conservative view of the farmgate forecast," chairman John Wilson said.

"As in the past two to three years, the recent rapid price movements in traded dairy products have been remarkable.

"The $4.60 is still a very conservative view on the end of the season because we are so early in the season.

"It feels like the market has turned but farmers need a lot more yet.

"We are getting back to more sustainable pricing but we are not there yet."

Wilson said the 5%-plus anticipated drop in milk supply would help peak processing efficiency and product optimisation but he denied Fonterra now had over-capacity.

"We have been catching up with new processing capacity and it doesn't cost much to mothball older plants if they are not needed at peak – nothing like the $50 million cost of under-capacity over recent peaks.

"Much of the new capacity is in value-adding facilities that start generating profits and debt repayments straight away."

The substantial downwards revision of the GDT offerings, which had boosted prices, reflected Fonterra’s revised view of NZ milk production.

“GDT is our surge tank – it reacts very quickly to our signals on milk production,” Wilson said.

A strong second-half result in FY2015 was a result of a drive on cash and costs, chief executive Theo Spierings said.

Improved processing efficiency meant more cheese and casein at the expense of bog-standard milk powder.

Better margins lifted the ingredients business performance 43% to $973m earnings before interest and tax (Ebit) and group costs.

That was a record result for the ingredients division, which made a 9.3% return on capital, Spierings said.

Consumer and food service businesses had normalised Ebit of $408m, up 216%.

Value-added volume had increased 14%, now inclusive of all Dairy Partners America sales, for a return on capital of 25.5%.

All milk growth in NZ was now going into value-add products, generating higher returns.

"We have seen a significant lift earlier than we had anticipated but we are still taking a conservative view of the farmgate forecast."

 

John Wilson

Fonterra

The co-operative was shedding 750 jobs, even now that recovery was under way, because “if we want to set world-record times in the dairy marathon, we have to lose weight first,” Spierings said.

The final milk price for last season was unchanged at $4.40/kg MS and the annual dividend 25c, the second-half 15c of which would be paid on October 20.

With the reconfirmed earnings guidance of 40-50c/share in FY2016, Fonterra's dividend announcements proved attractive on the share market, as FSF units rose 5% to about $5.50.

Share and unit prices have risen about 20% since their lowest point in July.

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