Friday, March 29, 2024

Milk price impacts vary widely

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Fonterra has published a shiny set of third-quarter numbers to cushion the impact on farmer-shareholders of a $1/kg reduction in the mid-point of its milk price forecast for next season.
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Ten days before the start of the new season it released a wide-ranging $5.40 to $6.90 opening forecast – representing the difference between despair and satisfaction for New Zealand farmers.

At the same time it shrank the range for this season, now $7.10 to $7.30, and showed the big blocks are in place for a solid outcome to a tumultuous year.

Normalised earnings before interest and tax for the nine months were $815 million, up $300m from the previous corresponding period.

Reported Ebit was $1.1 billion, three times that of the 2019 comparison, before impairments and other normalisations.

The guidance for earnings a share was left at 15c to 25c with an expectation of delivering in the top half of the range, chief executive Miles Hurrell said.

No decision has been made on the payment of a dividend and the wide range reflects the challenges of nailing the full-year earnings in a world of unknowns.

“There are significant uncertainties in the last quarter – how quickly the food-service sector recovers, timing of shipments and how the economic downturn will impact us,” he said.

“As an exporter of 95% of our production, many of our markets are prone to sudden shocks.

“However, the global nature of covid-19 is like nothing we have experienced before.”

Chairman John Monaghan was pleased to be able to signal the $7.20 mid-point this season while opening the new season at a $6.15 mid-point.

The new advance payment rate policy announced in April will deliver a starting level of $4.01 in June-August, being 65% of $6.15.

The schedule is effectively front-loaded to deliver $30,000 more for the benefit of the average farm before Christmas, he said.

That benefit is derived from the improved cashflow in the co-operative – $698m over nine months, up $1.4b on the previous comparable result.

Debt had fallen to $5.7b on April 30, down from $7.4b.

With his two-year term as chairman coming to an end at the annual meeting in November Monaghan said the fourth quarter will be very challenging.

European and United States dairy companies will produce more of Fonterra’s product range and their governments are already starting to support farmers and prices.

Digging into the divisional results and the different markets, Hurrell said ingredients delivered normalised Ebit of $668m, up 9%, food service $208m, up 54%, and consumer $187m, up 46%.

The effects of covid-19 on ingredients were minimised by advance contracting and consumer sales spiked as people stockpiled and bought food to cook at home.

Australia’s ingredient business, while only a tenth the size of NZ’s, continued to struggle for any profitability, reporting a gross margin of 1%.

Food service operations were the most affected as restaurants, bakeries and cafes closed under lockdowns, especially during the second quarter.

While Chinese food service has recovered it is not back to 100% and shutdowns are now affecting Oceania, southeast Asia and Latin America.

“We expect this impact to show up in our fourth-quarter results.”

Hurrell said the width of the milk price forecast range for 2021 reflects the increased uncertainty the co-operative faces.

“We are saying that the final milk price in 15 months’ time could have a five in front of it but global economies may pick up faster than predicted, hence the six.”

DairyNZ said its farmers’ break-even price for 2021 is $5.80 to $5.90, excluding principal repayments or buying assets.

Chief executive Dr Tim Mackle encouraged farmers to get their own budgeted expenses down below the break-even price.

“For most a break-even under $5.75 is achievable with reduced spending on the big-ticket items of feed, wages and repairs and maintenance along with restrictions on capital expenditure and personal drawings.”

ASB senior rural economist Nathan Penny said the lack of a dividend announcement shows Fonterra is still in repair mode.

“While last year’s result set an incredibly low bar the result, nonetheless, does indicate that Fonterra is on track to record a profit this financial year.”

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