It increased the forecast payout on Friday by a healthy 75c to $6/kg milksolids (MS) and maintained earnings guidance at 50c to 60c a share, from which farmers could budget on receiving 40c.
Such a substantial rise in milk price forecast had not been seen since early in the 2007-08 and 2009-10 seasons, under the influence of the so-called soft commodities boom at that time.
The forecast improvement followed world dairy price improvements of 55-65% on the Global Dairy Trade platform since the start of the season on June 1.
Fonterra began the season at $4.25/kg MS and had now lifted its farmgate forecast by 40%, announcing two consecutive 50c increases, followed by the 75c one.
AgriHQ dairy analyst Susan Kilsby said she was not surprised by the strength of the latest increase because her own milk price model now sat on $6.24/kg MS.
That factored in GDT levels plus some modest increases in the region of US$200/tonne between now and next June, as indicated by the whole milk powder futures market.
Because European dairy farmers were constrained in their ability to respond to higher world prices and NZ and Australian milk production was well down, Kilsby did not foresee any supply threats to Fonterra’s $6.
The European Union might begin to sell stockpiled skim milk powder but it would not do anything detrimental to its support for dairy farmers.
European farmgate prices were now increasing, though they did not fall as far as in NZ and milk production increases could not be expected until April.
“Therefore, any supply response capable of shifting prices will be a 2017 story,” Kilsby said.
Federated Farmers dairy section chairman Andrew Hoggard said he could not see any big supply changes on the horizon and therefore the $6/kg MS looked reasonably secure.
“The dividend expectation means the company is performing well, even as its margins are closing.
“But North Island farmers had their milk production peak cancelled by wet weather and we won’t get that milk back.
“People ask ‘why don’t you feed more supplements’ but if I was to do that my cows would just leave grass and I would lose money.”
Hoggard was especially pleased about the increase in the Fonterra advance rate to $4.10/kg for the December payment, describing it as cash in the hand, as distinct from full payout and dividend value as much as 10 months away.
ANZ rural economist Con Williams said about 60% of this season’s production had now been processed and sold and the $6 payout forecast was still conservative.
Based on what had been sold already and current GDT levels, further upside of 20-30c was indicated, he said.
Fonterra said gross revenue in the first quarter of its financial year (August-October) was up 6% to $3.8 billion, sales volume was up 2% and gross margin unchanged at 22%.
The consumer and food service business had achieved a gross margin of 31% and 128 million litres more of milk had been used in those products compared with the first quarter in the prior financial year.
October’s milk collection was down 8% and the annual production forecast remained at minus 7%.
Earnings faced headwinds from rising commodity prices and reduced milk collection, chief executive Theo Spierings said.
