But it has revised its forecast normalised earnings per share guidance range down to 25-30 cents a share and the forecast dividend range for the full year down to 15-20 cents a share.
Chairman John Wilson said the strong opening milk price will be very welcome news for the co-operative’s farmers as they look ahead to the new season.
“What we are seeing is a continued positive global supply and demand picture which gives us the confidence to increase our current forecast farmgate milk price into the new season.
“Demand is expected to remain strong – especially from China and for butter and AMF.
“We are expecting the global dairy market’s current prices, especially for fats, to continue throughout the new season.
“We are also forecasting our New Zealand 2018-19 milk collections to be 1525 million kilogreams of milksolids, a 1.5% increase on our current forecast for this season and we expect to see a lift in supply from the European Union, United States, Australia and Argentina.
“We will announce our forecast earnings per share for the 2019 financial year in July as normal. This, along with our forecast Farmgate Milk Price, comprises the total available for payout to our farmers.”
Fonterra is required under the Dairy Industry Restructuring Act to announce its forecast milk price at the beginning of each season which starts on June 1.
Wilson said the strong milk price reflects a global supply and demand picture that continues to be positive for farmers.
“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.
“Our co-operative’s forecast milk collections here in NZ have increased to 1500m kg MS, up from the 1480m kg MS we reported at half year thanks to improved farming conditions in March and April after a challenging spring and summer.
Commenting on what the higher forecast Farmgate Milk Price means for the business Wilson said the higher milk price is good news for farmers still recovering after the two years of lower milk prices in 2015 and 2016.
However, the higher milk price puts pressure on Fonterra’s earnings in a year already proving challenging because of the payment to Danone and the impairment of the Beingmate investment.
“As a result, we are revising our forecast normalised earnings per share guidance range down to 25-30 cents per share and our forecast dividend range for the full year down to 15-20 cents per share.
“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.”
Chief executive Theo Spierings said 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”.
Fonterra’s revenue of $14.8 billion for the first nine months of 2017-18 is up 7% on the same period last year, as a result of higher prices.
“In the first half of the year we felt the impact of the record low inventory followed by the low spring milk collections in NZ due to difficult weather conditions.
“This meant our sales teams had less product to sell.
“We were expecting our earnings to be weighted in the second half of the year and this has not transpired due to the rapid rise in our input costs late in the season into our value-add business.”
With total volumes down 5% to 16 billion LMEs and gross margin down to 16% from 18% for the first nine months of the year, compared to the same period last year Spierings said the business has not delivered the third quarter results it had planned.
“With the increase in the price of milk fats we have also seen continued demand towards products with a lower fat composition, sustained competition in greater China’s food service market and further constraints in some Asian markets limiting our ability to pass through costs.”
These challenges, along with the Danone payment and the impairment of the Beingmate investment mean Fonterra’s gearing ratio is expected to be above the target 40-45% range.
“We expect to be back within the target range next year,” Spierings said.
“While the strong milk price is good for our farmers it does make the remainder of the year challenging for the business.
“We remain committed to maximising the total payout for our farmers and value for our unitholders by delivering the best possible earnings,” he said.
