Fonterra lifts milk price payout after strong first quarter

Dairy giant Fonterra has announced an increased forecast Farmgate Milk Price of between $7.00-$7.60 per kgMS after a strong start to the 2020 financial year.

The co-op has been working on a new strategy since reporting a loss of $605 million for the 2019 financial year.

A focus on repaying debt has seen it sell assets, including iconic ice cream company Tip Top, and freeze salaries and bonuses for its highest-paid employees.

Fonterra Chairman John Monaghan said the co-op had continued to earn good prices for its milk and as a result has increased the mid-point of its forecast Farmgate Milk Price range by 25 cents to $7.30 per kgMS.

"The higher price reflects a global dairy market that is tipped slightly in favour of demand. 

"Our New Zealand milk production is forecast to be up 0.5 percent on last year. Annual milk production in the other key global supply regions of the US and EU are both growing at less than 1 percent," he said.

Fonterra Chairman John Monaghan said farmers would welcome what would be the fourth highest milk price in the co-op's history.
Fonterra Chairman John Monaghan said farmers would welcome what would be the fourth highest milk price in the co-op's history. Photo credit: Supplied

He said Global Dairy Trade prices had increased by about 6 percent since the previous forecast. 

Whole milk powder (WMP) prices, a key driver of its milk price, have hit their highest level since December 2016.

"At this stage of the year, we have contracted a good proportion of our sales book and that gives us the confidence to increase the mid-point of our forecast Farmgate Milk Price range by 25 cents.

"Farmers will welcome what would be the fourth highest milk price in our history. It represents a $11.2 billion cash injection into our communities."

Meanwhile Fonterra CEO Miles Hurrell said the co-op had made good progress moving to its new strategy and had had a strong first quarter.

He said there was still a focus on reducing further debt, so it was no more than 3.75 times earnings. 

"This will require us to achieve a gross margin of $3 billion, further reduce operating expenditure, lower capital expenditure by $100 million to $500 million, and also divest some more assets."

"I'm pleased to see this level of improvement. Our people are doing a great job of putting our strategy into action. There's more to do but the wheels are definitely in motion."

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