Fonterra warns of hit to milk production as flooding risk rises from La Niña weather pattern

Western Star butter maker Fonterra says while the outlook is balanced, Australia heading into its third consecutive La Niña poses risks to peak production.

Fonterra said Australian milk production fell 8.3 per cent in July, compared with the same month last year. Picture: Nicole Cleary

Wet weather from a third consecutive La Niña weather pattern threatens to push down milk volumes during peak production, Fonterra warns, as Australia’s dairy pool continues to shrink.

Fonterra – the world’s biggest dairy exporter which produces brands including Western Star butter, Perfect Italiano and markets Bega Cheese under licence – said on Friday Australian milk production had slumped 8.3 per cent in July, compared with the same month last year.

The co-operative said much of the recent declines came from the dairy rich regions in Tasmania, which dived 14.7 per cent, and Victoria which fell 7.5 per cent.

“This is still early in the season and volumes only represent a small proportion of full season production,” the company said.

New season Australian milk production is forecast to remain flat to marginal growth year-on-year. Fonterra collections in Australia are reported for August.”

Fonterra shelved a $1.2bn float of its Australian operations last week, following a 12-month ownership review.

The decision came as bankers and lawyers have contended with a dearth of initial public offerings this year. Equity capital markets activity – including secondary raisings and sharemarket floats – has dropped $US8.62bn ($13bn), or 38.4 per cent, so far in 2022, given choppy markets.

In the dairy sector, companies have had to combat a 30 per cent surge in the price they pay farmers for their milk, with Fonterra paying Australian farmers a record $9.40 per kilogram for milk solids. The soaring milk price reflects a rebound in global commodity prices but, more troubling, an ongoing exodus of dairy farmers, drying up the nation’s milk pool.

In the past 20 years, milk production in Australia has slumped more than 21 per cent to 8.5 billion litres. Fonterra Australia, which has a 15.9 per cent of the nation’s milk pool, has managed to stabilise its collections at 1.4 billion litres.

While it’s expecting flat or modest growth this year, there remains uncertainty with a wetter than average year for the third straight year from the La Niña weather phenomenon.

“The new season outlook remains balanced. There is a 70 per cent chance of a third consecutive La Niña developing over spring/summer posing risks to peak production and flooding,” the company said.

Fonterra is the world’s biggest dairy exporter. Picture: Zoe Phillips

While rain is welcome in dairy farming, like any agribusiness, too much at the wrong time can destroy pastures, with cows tearing up soil in what is known as pugging. In severe cases, it can take pastures two springs to recover.

The US was the only country to report a rise in milk production, with Fonterra reporting a 0.3 per cent increase in the year to August. Production declined 4.4 per cent in New Zealand over the same period, with the European Union eased 0.5 per cent.

“August was marked by some of the warmest temperatures on record. This was combined with extreme rainfall and flooding while other regions remained dry,” the co-operative said about its New Zealand milk production.

While in Europe: “Milk production levels remain low as drought conditions, limited feed availability and rising input costs continue to impact key regions”.

“Production declines were observed more notably in France, Spain and Ireland but partially offset by higher production from Netherlands and Poland.”

Fonterra Australia’s exports jumped 16.4 per cent, or 133,701 tonnes, in the 12 months to July. “This was predominantly driven by increases in fluid milk products and SMP (skim milk powder)”.

Since April 2020, global skim milk powder prices have surged more than 49 per cent to $US3546 ($5455.76) a tonne.

Fonterra Australia’s revenue leapt 7 per cent to $NZ2.09bn ($1.84bn) in the year to July 31. This equated to 9 per cent of Fonterra’s overall revenue, which jumped 11 per cent to $NZ23.4bn.

Meanwhile, Australian earnings before interest and tax jumped 43 per cent to $NZ106m, and EBIT margin rose to 5.1 per cent from 3.8 per cent.

Fonterra Australia managing director René Dedoncker attributed the result to maximising the value of every drop of milk that passed through the co-operative.

“It is about margin. While the milk price is high, what we focus on is what is the farmer margin profile? The processor needs a margin as well, it’s not one or the other, and of course the consumer at the end of this has to be able to afford it,” Mr Dedoncker said last week.

“So it’s a really fine balance of creating value for the consumer, value for the farmer and value for the processor. We have got a business system that is really good … and what we’ve done is to be really clear that we have got products that consumers want and at the other end security of supply.”