Fonterra predicts a lift in dairy prices later this year

Fonterra has said that it expects dairy prices to pick up at the end of the year as it posted interim results with a forecasted milk price of $3.90/kgMS (€2.30/kgMS).

The $3.90/kgMS is the equivalent of 18c/L.

It results state that it moved an additional 235m litres of milk higher up the value chain into consumer and foodservice products during the year.

The co-op group’s announced normalised earnings before interest and tax (EBIT) of $665m up 77% on the comparable period, and net profit after tax of $409m (€245m) up 123%.

Chairman John Wilson said that the supply and demand imbalance in the globally traded dairy market has brought prices down to unsustainable levels for farmers around the world, and particularly in New Zealand. The strong New Zealand dollar has also had a negative impact on the milk price, he said.

“The low prices have placed a great deal of pressure on incomes, farm budgets, and our farming families.”

“Our forecast Farmgate Milk Price of $3.90/kgMS reflects low global dairy prices, with Whole Milk Powder decreasing around 17% this season to date.”

Fonterra Outlook

Current global economic conditions remain challenging and are impacting dairy demand and prices, said Chief Executive Theo Spierings.

“The balance between available dairy exports and imports has been unfavourable for 18 months following European production increasing more than expected and lower imports into China and Russia. This imbalance is likely to continue in the short term, with prices expected to lift later this calendar year.”

The long-term fundamentals for global dairy, he said, are positive with demand expected to increase by 2-3% a year due to the growing world population, increasing middle classes in Asia, urbanisation and favourable demographics.

Fonterra’s net debt is $6.9 billion and it is expecting this to reduce significantly in the second half of the year.

Business Performance

Chief Executive Theo Spierings said the Co-operative’s strong performance reflected a sustained effort in three main areas.

“We focused on the efficiency of our ingredients business and capturing demand for ingredients in a wide range of markets.

“We aimed to make the most of global consumption growth by building demand for higher-value products in our consumer and foodservice markets.

“Our working capital has improved significantly, and our inventory levels are lower than in recent periods for this time of year – down 9% in volume terms due to strong sales.”

“The additional 235m litres of milk we converted into higher-returning consumer and foodservice products in this six month period built on the additional 600m litres last year.

Our farms in China are a key part of our integrated dairy business. We are achieving operational efficiencies on the farms which are helping offset the current low domestic milk price in China.”