Fonterra lifted its forecast farmgate milk price range 30c to $6.30-$6.60/kg MS on the back of improved demand from Asia, specifically China, and bad weather slowing production in Australia and Europe.
Countering that, geopolitical pressure in Latin America has made trading conditions difficult in some countries, chief executive Miles Hurrell said.
“In addition, the increase in milk price, which is the primary cost input into our non-milk price products, has put pressure on the margins for those products and they significantly contribute to our earnings,” he says.
Fonterra’s forecast earnings range has been reduced from 25-35c in December to 15-25c a share because of debt reduction priorities but the advance payment to suppliers has improved 20c/kg to $6.45c/kg.
Monaghan said shareholders face some major decisions about the co-operative’s future direction and they will be given an update on the board’s strategic review with the March 20 interim result.
That review will include a look at its dividend policy but also give direction on where Fonterra believes it can win and which products and markets give it a competitive edge.
“The operational performance is not where it needs to be but it’s not something you can fix in six months, hence the fundamental review of our strategy,” he said.
Fonterra has already signalled its intention to sell Tip Top and to unwind its joint venture ownership with Beingmate of the Darnum plant in Victoria, Australia, and Monaghan says a decision on the future of a third business is almost confirmed but it is too early to provide details.
Hurrell said the portfolio and asset divestments review aims to reduce debt by $800m this financial year.
“We are also on track to meet our targets for capital expenditure and operating expenses.”
The main pressure points remain Australian ingredients and food service in Asia.
“We are making inroads in addressing them but they will not be solved overnight.”
Forecast milk flow this season has been revised lower because of recent dry conditions but is still picked to be 2% above last year at 1530 million kilos.
Monaghan said recent rain eased feed pressure in some areas but with Australian milk flows as much as 7% lower than last year and Europe 1% higher NZ is in an excellent space as demand picks up.
Interest at Global Dairy Trade auctions has improved in recent weeks and European stocks of skim milk powder have been cleared.
“We expect demand to remain stronger relative to supply for the rest of the season,” he said.
