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High milk prices eat into Fonterra earnings

3rd December 2021 By Bridget O'Connell | | @foodtickernz

Fonterra has posted a 24% drop in its first-quarter EBIT and downgraded its earnings guidance after lifting its farmgate milk price range to the highest level since it was founded 20 years ago.

EBIT fell 24% to $190m as input costs increased.

The dairy giant increased and narrowed its farmgate forecast for the 2021-22 season to between $8.40 and $9 per kilogram of milk solids. It followed its first increase to the forecast in late October when it guided between $7.90 and $8.90 per kgMS.

The move saw the midpoint increase from $8.40 to $8.70, which would see it contribute more than $13.2bn to the New Zealand economy – the highest level since the co-op was formed in 2001.

At the same time as announcing the new pricing, Fonterra downgraded its earnings guidance to 25-35 cents a share from 25-40 cents a share

Chief executive Miles Hurrell said the higher milk price was the result of consistent strong demand for dairy at a time of constrained global supply.

“We’ve seen the impact of a number of events play out this first quarter. That includes the high price of feed in the US, which has seen milk production growth stall and a lower-than-expected supply picture in Europe,” he said.

Hurrell noted demand had softened “slightly” in China, but added “global demand remains strong, and we think that will remain the case for the short to medium term.”

Fonterra also provided an update on its first quarter performance, posting a total group EBIT of $190m for the three months to 31 October.

This was down almost a quarter from the $250m delivered in Q1 last year as input costs increased, driven by a 30% rise in whole milk powder prices.

Hurrell said there were a number of factors at play in the first quarter.

“We’re seeing stable sales volumes in our foodservice channel, but a milk price at these high levels has squeezed margins,” he said.

“Our Chilean business continues to improve but tightening margins and weaker local currency in other markets have impacted our consumer channel overall.

“In our ingredients channel, we’re seeing margins in our longer-term pricing contracts return to more normal levels, which has helped push total group gross margin up from the last quarter last year.”

The co-op has lowered interest expenses and operating expenditure was down 2% on the same quarter last year, Hurrell added.

“Looking at the whole picture, I’m proud of what we’ve achieved. With EBIT of $190m and a strong Farmgate Milk Price, we are starting to consistently deliver solid commercial outcomes.”

But he sounded a note of caution around the emergence of Omicron and global economic recovery, which led the co-op to build in a 60-cent range to the farmgate milk price forecast.

“The resilience of our people and our supply chain means we continue to stay on top of the strong demand for our New Zealand milk,” Hurrell said.

“However, it is concerning to hear about new variants, which are potentially more resistant to vaccines. There is also the ongoing question of whether economies can rebound from the pandemic and then sustain their financial health.”



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