Fonterra hikes farmgate milk price 75c to $6/kgMS

Fonterra has increased its forecast farmgate milk price by 75c to $6/kgMS for the 2016/17 season.

When combining with earnings per share for the 2017 financial year, of 50c to 60c, the total payout is $6.50 to $6.60 – well above breakeven for the average farmer.

Fonterra chairman John Wilson says this increase reflects the improvement in pricing since September, following a gradual rebalancing of global supply and demand.  

“We’ve seen falling production in the major exporting regions, particularly Europe and Australia, and an unprecedented decline in New Zealand milk supply due to wetter than normal spring conditions across most regions.”

He says on balance, demand continues to be firm.

“As a result, there has been a steady improvement in global dairy commodity prices and this is reflected in the improved forecast.”

Prices on the GlobalDairyTrade (GDT) auctions have been rallying, with whole milk powder prices increase by 3.2% and leaping 20% a fortnight ago.

Earlier this week ASB rural economist Nathan Penny said a $6/kgMS payout was “in the bag.”

“If we were to change it, we would see it going higher rather than lower.”

He said the milk price rally at the GDT has been supply-led, rather than being driven by demand.

Fonterra has reported milk volumes across the central and upper North Island over October have been weak, with this weakness continuing into November.

Mr Wilson agrees.

“We are very mindful that farm incomes will be affected this year because of lower milk production so we will be doing everything possible to build on our good start to the financial year and deliver the highest possible total payout to our farmers.”

Meanwhile, Fonterra’s first quarter revenue of $3.8 billion is up 6% on the same period last year.

Sales volumes are up 2% to 4.9 billion litres liquid milk equivalent (LME), while the gross margin of 22% remains largely unchanged.

Fonterra chief executive Theo Spierings says the co-operative has moved an additional 128 million litres LME into higher-value consumer and foodservice products compared with the same period last year.

“The consumer and foodservice business achieved an improved gross margin of 31%, up from 28%. This reflects the increasing strength of our brands in key markets and our focus on chef-led solutions in foodservice.”

He says Fonterra’s operating expenses have reduced by 2% to $621 million and the co-op continues to keep a close rein on them.