Fonterra cuts its farmgate milk price to $6.40/kg

Fonterra chairman John Wilson (right). Picture / NZME.

Fonterra has cut its farmgate milk price to $6.40/kg of milksolids from its previous forecast of $6.75/kg.
The cut was announced to the Australian stock exchange late last night.

Fonterra chairman John Wilson said the fall in the New Zealand dollar had partly offset the steep decline in Global Dairy Trade prices but said a cut in the forecast was a prudent step.

The GlobalDairyTrade price index rose 0.4 per cent in this week's auction, after four consecutive declines, although the gain came on lower volumes sold.

Fonterra's revised forecast still sits above DairyNZ's latest estimate of breakeven, of $5.20-$5.25/kg, and compares with last year's price of $6.12/kg. Wilson said the cut reflected ongoing volatility in global dairy prices and cited a 10 per cent drop in the price of whole milk powder since August 1.

"What is driving this forecast is that despite demand for dairy remaining strong, particularly in China, other parts of Asia and Latin America, we are seeing strong production out of Europe and continued high levels of EU intervention stockpiles of skim milk powder," he said.

The impact on Fonterra was being partly offset by a weaker New Zealand dollar, he said.

Fonterra also cut its forecast New Zealand milk collection for this season, by 1 per cent to 1525 million kilos of milk solids from the 1540m it projected in October, which itself was a downgrade. The cut reflected "ongoing challenging weather conditions".

Revenue in the first quarter rose 4 per cent to $4 billion although sales volumes dropped 20 per cent to 3.9b liquid milk equivalent. Gross margins fell to 16.7 per cent.

Chief executive Theo Spierings said Fonterra started the year with record low inventory after the second straight year of low spring milk collections because of wet weather.

"This has challenged our ingredients business where we had lower volumes to sell," he said. "As a result, sales were down 19 per cent to 3.6 billion liquid milk equivalents [LMEs]."

The gross margin from ingredients fell to 8.1 per cent from 12.1 per cent.

Consumer and food service recorded "strong sales volumes in our key markets across Greater China and Asia with, overall, just a 3 per cent decline to 1.3m LMEs in total volume compared to the record levels at the same time last year," Spierings said.

The gross margin in consumer and food service fell to 24 per cent in the first quarter from 31 per cent a year earlier. Spierings said Fonterra is confident of meeting its full-year forecasts following revisions after the recent Danone announcement.

Last week Fonterra cut its forecast for 2018 earnings per share to a range of 35 to 45 cents, from 45 to 55 cents after an arbitration tribunal in Singapore ruled it must pay 105m euros to Danone for 2013's whey protein recall.

Farm balance sheets came under severe pressure when prices slumped to $3.90/kg in the 2014/15 season and to $4.40/kg in 2015/6 - well below most farmers' break even points.

The slump saw Fonterra offer a soft loan scheme to help farmers through the downturn. Most took up the offer, to the tune of just under $400 million.

- Staff Reporter, BusinessDesk