Fonterra forecasts record farmgate milk price for new season

Fonterra has announced a record opening forecast farmgate milk price for the new season but the company's earnings have taken a hit owing to a drop in sales and pressure on margins.

In its third quarter update, the co-op set the 2022/23 season forecast payout to farmers, to be between $8.25 to $9.75 per kilogram of milk solids, with a mid point of $9.

For the current season, it maintained its 2021/22 forecast farmgate milk price to be between $9.10 to $9.50 per kilo of milk solids, with a mid point of $9.30, which is also a record.

Chief executive Miles Hurrell said the strong opening forecast reflected continued demand for dairy and constrained global supply.

"The long-term outlook for dairy remains positive, despite recent geopolitical and Covid-19 related events impacting global demand in the short-term.

"On the supply side, growth from key milk producing regions is expected to remain constrained as high feed, fertiliser and energy costs continue to impact production volumes," he said.

The company said for the nine months ended April sales volumes were down as a result of lower milk collections and the timing of sales, due to the lockdowns in China, the economic crisis in Sri Lanka and the war in Ukraine.

Underlying earnings were down 14 percent, or $134 million, to $825m reflecting the drop in sales volumes, continued pressure on margins from the higher milk price, ongoing Covid-19 disruptions and the rapid decline of the Sri Lankan rupee.

Fonterra's reported net profit after tax for the period was $472m, down $131m from the same period last year. Its normalised profit was down $115m.

Hurrell said despite the significant market disruption, the company continued to deliver a strong milk price and solid earnings.

"As an exporter, many of the markets we operate in have been prone to sudden shocks, which can impact what we sell, where we sell it and when, but right now we're feeling the impact of multiple events across multiple markets.

"We are actively managing the challenges arising from Covid-19 and other geopolitical and macro-economic events. However, increasing market volatility and uncertainty, ongoing supply chain disruptions and growing inflationary pressures have added increased complexity."

Hurrell said despite facing challenges in the third quarter, the co-op has continued to take steps towards its long-term strategy.

"Following the government's announcement that it would make the necessary legislative amendments to support our new flexible shareholding capital structure, the government consultation process is underway, and we expect the amendments to progress through Parliament this year," he said.

Hurrell said Fonterra was continuing its ownership review of its Australian business and the divestment process of its Chilean business was underway.