Fonterra lifts earnings forecast, lowers farmgate price guidance

The world’s biggest dairy exporter says the fundamentals of dairy farming remain strong despite inflationary pressures mounting.

Fonterra is expecting earnings per share to soar as much as 16.6 per cent this year. (Photo by William WEST / AFP)

Fonterra, the world’s biggest dairy exporter, says its full year earnings will soar up to 16.7 per cent higher than expected as the co-operative narrows its forecast price it will pay farmers for their milk.

The New Zealand dairy titan said on Thursday it now expects to deliver NZ50-70c (47.3-66.2c) earnings per share, up from the NZ45-60c it forecast previously after a strong first quarter.

Meanwhile, it has lowered its farmgate price guidance at the top end, expecting to pay farmers $NZ8.50-$9.50 per kilogram milk solids this season, down from $NZ8.50-$10. But Fonterra chief executive Miles Hurrell said the co-operative would hold its advance rate.

It comes as net profit surged 84 per cent to $NZ214m in the three months to October 31, while revenue jumped 32 per cent to $NZ5.79bn.

“The sustained strong margins in our protein portfolio give us the confidence to upgrade our earnings guidance, although the wider range reflects the volatility in the market which we expect to continue in the short to medium term,” CEO Miles Hurrell said.

“If these conditions continue for a further extended period, it could have an additional positive impact on forecast earnings.”

The quarterly strong result is despite the co-operative experiencing higher costs “at every point in our supply chain”.

“There’s no doubt that we’re in a period of increased global uncertainty. Inflationary pressures are being felt both on farm and across our business but looking further out, the fundamentals for dairy remain positive,” Mr Hurrell said.

Milk production also is lower across all export regions, with New Zealand down 2.9 per cent compared with the same period last year. At the same time demand for whole milk powder in China has softened but the co-operative has managed to sell more of the product to other markets.

“Globally, milk supply from key exporting regions is down over the last 12 months. Production in Europe and Australia continues to be down, with US milk supply showing a slight improvement in recent months,” Mr Hurrell said.

“Global market volatility has prompted some softening of demand for whole milk powder, particularly in Greater China and this is reflected in our forecast Farmgate Milk Price range.

“We’ve seen increased participation from other regions which has offset in part the drop in demand from Greater China. While it’s still early in the financial year, we are happy with our sales contract rate.”

Fonterra abandoned a $1.2bn float of its Australian business in September as the nation’s milk pool continued to shrink and farm gate prices surged 30 per cent higher than expected. It also settled a class action with about 1000 Australian farmers for $25m last month over its decision to “clawback” milk payments six years ago.

While the float of the Australian business was aborted, Mr Hurrell said the co-operative had agreed to sell its Chilean operations, which would “target a significant capital return for our farmer shareholders and unit holders”.

“A strong united Co-op is important for our shareholders, our unit holders and New Zealand as a whole, so we’re looking forward to implementing our flexible shareholding capital structure next year.

“Our Flexible Shareholding capital structure makes it easier for new farmers to join our co-op, and for existing farmers to remain with our co-op. This supports our strategy, to maintain a sustainable milk supply, protect farmer ownership and control, and support a stable balance sheet.”

As New Zealand Prime Minister Jacinda Ardern flags plans to tax greenhouse gases emitted from farm animals from 2025, Fonterra has partnered with Nestle to create the Pacific nation’s first net zero emissions dairy farm.

The project will partner with the Dairy Trust Taranaki to examine all areas of farm operations with the aim of a 30 per cent reduction in emissions by 2027.

“Over the next five years, the partnership will examine all aspects of farm operations to identify opportunities for carbon reduction by using proven and future technologies to work towards its net zero carbon target. We’ve also signalled that we’re considering setting a target for scope 3 emissions,” Mr Hurrell said.