Fonterra is expected to produce a slightly weaker annual result on Monday as higher farmgate milk prices, which act as a higher input cost, eat into its margins.
The farmgate milk price was $6.15/kg of milksolids for 2016/17 and the company has a $6.75 forecast for the current 2017/18 year.
Both prices are well ahead of the 2014/15 price of $4.40/kg and the 2015/16 price of $3.90/kg, which were substantially below most farmers' breakeven point.
Last year's annual net profit for the year to July 31 came to $834 million, up 65 per cent on the previous year.
Arie Dekker, head of institutional research at First NZ Capital, expected Fonterra's earnings per share to come in at slightly under 50c, down from 51c in 2015/16.
This is slightly below the bottom end of Fonterra's initial guidance of 50c to 60c which was later revised down to 45c to 55c.
"That level of profit is in line with what Fonterra has achieved for much of the last 10 years and remains disappointing given the efforts and investment to grow earnings, particularly in the last five years," Dekker said.
Forsyth Barr analyst James Bascand said Fonterra's earnings would be constrained by the higher milk price. He also expected a profit near the bottom of Fonterra's forecast range.
"We are at the bottom of that range given the rise in input costs over the past year," he said.
"There is always a lag between their ability to push through prices in their end markets, which makes it a bit of a challenge for them in the short term."
ASB rural economist Nathan Penny said the dairy pie was bigger now that milk prices had improved.
"But in terms of corporate performance it [higher milk prices] does tend to put the brakes on its earnings performance, to a degree," Penny said.
"It appears that the result is going to be ok without setting the world on fire."
Fonterra's result coincides with speculation in the Australian media that the co-op, along with several other large multinational dairy companies, is interested in the Australian dairy company, Murray Goulburn, which is undergoing a strategic review.
Asked to comment, a spokesman for Fonterra said: "We are committed to growing our business in Australia and will look at all opportunities that make sense to continue building a strong and sustainable business there."
"We cannot comment on any merger and acquisition activity," he said.
The Australian this week said China's dairy powerhouse Yili Industrial Group had made a "knockout bid" for Murray Goulburn, adding that NZX-listed A2 Milk may also be a contender.
Yili yesterday said it had submitted "a cautious non-binding strategic development proposal" to the unprofitable dairy cooperative, although its Chinese language statement described media reports that it had offered A$1.20 per unit as market speculation.
MG Unit Trust's price rose 14.2 per cent to A88.5c on the ASX, and earlier touched A94.5c, the highest since late May.
At Monday's result, analysts expect to get a full run down on Fonterra's 18.8 per cent stake in Chinese infant formula company, Beingmate.
Analysts have long questioned the investment in Beingmate, which has struggled to perform since Fonterra spent $755m on its stake in 2015.
First NZ's Dekker, in a recent report, said: "We view the investment as a material one from both a financial and confidence perspective and think that the time is right for Fonterra to provide a more fulsome disclosure on what has happened with Beingmate and the reasons why it remains confident in the long-term future."
"We think the analysis of financial performance and Beingmate's share price performance since Fonterra invested forms a reasonable basis on why Fonterra needs to be more fulsome in its discussion on Beingmate when it reports its full-year result, particularly with some valid questions on the value of Beingmate in Fonterra's accounts."
First NZ values the Fonterra stake in Beingmate at about $420m.
- Additional reporting BusinessDesk