Fonterra has raised its forecast milk payment to farmers for this season to match its previous record high, as demand for dairy holds up while supply tightens.
The co-operative lifted and narrowed its forecast farmgate milk price range for the 2021/22 season to between $7.90 and $8.90 per kilogram of milk solids, from $7.25 to $8.75 per kgMS.
The midpoint of the range, which farmers are paid off, increased to $8.40 per kgMS, from $8 per kgMS. That would match the previous record paid in the 2013/14 season and would see almost $13 billion flow into regional New Zealand. It paid $7.54 kgMS last season.
New Zealand is heading into its peak milk production period in late spring and output so far is below last season, constrained by poor weather and limits on expansion. Milk production is also soft elsewhere, due to poor weather and high feed costs. At the same time, demand is holding up and Fonterra is looking to move more of its milk into higher value products, boosting profitability.
“These supply and demand dynamics are supporting the current pricing levels, and a higher contract rate has given us the ability to narrow the forecast range.”
Fonterra chief financial officer Marc Rivers said while Chinese buyers had pulled back over some recent Global Dairy Trade auctions after prices surged higher, they had returned as the most dominant buyers at the last auction.
There may have been an element of “playing chicken”, with buyers securing inventory early and then waiting to see if prices would settle, then having had to return to the market to replenish stock, he said.
Fonterra continued to see fairly steady consumer demand in China, he said.
Other milk processors will be facing the same market dynamics as Fonterra and will probably have to keep up with the farmgate milk price, he said.
“Economically for New Zealand, that is really good news,” Rivers said. “If it plays out the way we are forecasting then all farmers will benefit from that.”
Whether prices would rise for consumers was up to retail chains who had a lot of discretion over the end price to customers, he said.
Fonterra exported 95 per cent of its products and saw different responses from retailers across its markets, he said.
Rivers said the co-operative is “pretty well hedged” for its currency exposure for this season and was starting to hedge for next season as it looked 12 to 18 months out.
While higher milk prices are beneficial for farmers, they can squeeze profit margins for milk processors like Fonterra unless they can sell their products at higher prices as well.
Rivers said price increases had been broad based across a range of products and said Fonterra remained comfortable with its current 2021/22 earnings guidance range of 25-40 cents per share.
Hurrell noted it was still early in the season and a lot could change.
Increased volatility was more likely when prices were high and that’s why the co-operative maintained a range in its milk price forecast, he said.
The co-operative was keeping an eye on things that could impact demand, including Covid-19, inflation pressures, exchange rate volatility and weather conditions as well as the effect of any geopolitical issues, he said.
It has maintained its New Zealand milk collection forecast of 1525 million kgMS for this season, down from 1539 million kgMS last season.
Fonterra’s advance rate scheme spreads risk from fluctuating global dairy prices across the year by breaking up payments to farmers based on the forecast farmgate milk price. Without the scheme, the co-operative would require more equity.
By July 31 each year the co-operative has paid 85 per cent of the milk price forecast to suppliers. After the annual results are announced in September, a wash-up is done based on the actual results. Farmers receive three retrospective payments of 5 per cent each in August, September and October.
