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Milking season has just begun and Fonterra is already forecasting a higher milk price for farmers.
Last week the co-op lifted this season's forecast Farmgate Milk Price range to NZ$8.75-$10.25 per kgMS, up from NZ$8.25-$9.75 per kgMS.
This increased the midpoint of the range, which farmers are paid off, by 50 cents, to $9.50 per kgMS, Fonterra's chief financial officer, Marc Rivers said.
"That just reflects the milk supply and demand picture that we're seeing - of course, helped by a strengthening US dollar as well," he told The Country Sport Breakfast's Brian Kelly.
Last week Fonterra also announced its 2022/23 earnings guidance range of 30-45 cents per share, along with an update on the co-op's progress towards its long-term aspirations.
"The strong earnings guidance for next year reflects an expected recovery in some of our key markets, where we'd experienced some margin pressures this past year. Also, we expect to see favourable Ingredients margins," Rivers explained.
However, the wide earnings range for the next financial year reflects the current high level of uncertainty that comes with operating in a globally-traded, volatile market.
Fonterra's long-term strategy
The co-op isn't just looking into the next couple of years - it also has an eye on the 2030 financial targets outlined in its long-term strategy.
While Fonterra was on track with these targets, the last few months had shown it wouldn't be plain sailing, Rivers said.
"Just think of [recent] global events that change some of the assumptions the aspirations were based on. "
These include rising interest rates and inflation, along with a lift in commodity prices due to continued strong demand for dairy.
Input cost increases are putting pressure on the cost of debt in the short term and have also pushed on-farm costs up.
This, in combination with ongoing regulatory changes, would potentially reduce milk supply volumes, Rivers said.
"As milk prices lift, we expect that will put more pressure on working capital for us, which means our overall debt position will probably trend a bit higher - but still well within our parameters."
Overall, the fundamentals of New Zealand dairy still looked strong, despite these pressures, Rivers said.
"We're making good progress towards those long-term aspirations."
As part of its long-term strategy, Fonterra also has an aspiration to grow its operating profit by 40-50 per cent, from its 2021 base, by 2030.
"The way that we can achieve this is [by] focusing on our New Zealand milk, focusing on sustainability, nutrition and our innovation credentials," Rivers said.
One way to increase value is to shift more of the co-op's Ingredients portfolio towards higher-value ingredients and solutions through Fonterra's Active Living business.
The global health and wellness market was valued at US$66b and growing at 6.1 per cent per year; while Medical Nutrition was valued at US$50b globally and growing at 5 per cent per year, Rivers said.
"We feel like we're really well-positioned to take a slice of those markets.
"We've got real expertise in protein to help people maintain muscle mass for better quality of life, dairy lipids that improve people's mood and probiotics to support immunity and digestion."
The USA had a strong interest in health and wellness, along with innovative companies dedicated to this trend, and this made it a market worth pursuing, Rivers said.
Fonterra wasn't only interested in the US, he said.
"We're also focusing on Japan [and] China and there continue to be opportunities in South Korea with the team scoping out Indonesia, Thailand and Vietnam for future potential.
"So, [there are] lots of areas we're excited about."