Fonterra forecast: Co-op to contribute $11 billion to NZ economy over next year

Fonterra has reported a sharp lift in its earnings for the first nine months of its financial year and has set a milk price for the coming year of $5.40-$6.90 per kg of milksolids.

The co-op said it will contribute about $11 billion to the New Zealand economy through milk price for the year.

Its advance rate schedule has been set off the mid-point of $6.15/kg.

The forecast for the current season is at the lower end of a previously advised range, at $7.10-$7.30/kg.

Chief executive Miles Hurrell said that despite Covid-19 challenges, the co-operative's total group normalised earnings before interest and tax (EBIT) for the nine months to April 30 was $815 million, an increase of $301m on this time last year.

The co-op's earnings forecast for the current year to July has remained at 15-25 cents a share and Hurell said he was confident the result would be at the upper end of the range.

However, the impacts of the Covid-19 pandemic would be keenly felt over the fourth quarter.

Fonterra has been re-organising its operations since reporting a $605m loss in the past financial year.

"The work done over the last year to strengthen our balance sheet, and the co-op's ability to respond quickly has helped us manage the Covid-19 situation over the last few months," Hurrell said in a statement.

The co-op was drawing on its global supply chain and diverse product and customer base to minimise disruptions for our customers and our business.

"Covid-19 has affected virtually every country, market and industry, and as a result, the global dairy market is volatile and the outlook is uncertain," he said.

Hurrell says all three of Fonterra's business units have delivered a good performance for the year to date, despite the negative impact the pandemic had on the food service business in the third quarter.

The ingredients business delivered a normalised EBIT of $668 million in the nine months to April 30, up 9 per cent from $615 million on this time last year, mainly due to improved margins.

Overall Foodservice EBIT for the year is $208m, up 54 per cent from $135 million but the business was the most affected by Covid-19.

Restaurants, bakeries and cafes in many of our markets were closed as a result of government-enforced lockdowns and restrictions, which affected sales in the third quarter.

"In China, the foodservice sector started its recovery relatively quickly, although it is still not at 100 per cent.

Sales in China fell in February but bounced back to more normal levels in March and this continued in April.

"We are now seeing the impact of COVID-19 across our foodservice businesses in Oceania, South East Asia and Latin America. We expect this impact to also show up in our fourth-quarter results," he said.

Hurrell said the co-op has a strong balance sheet with good cashflow and is continuing to reduce debt.

The co-op is on track to deliver on its gross margin target, with gross margin up $244 million on last year to $2.5 billion.

Fonterra's net debt reduced by 23 per cent or $1.7 billion.

Looking ahead, Hurrell said expected the Fonterra's full-year result to be at the top end of its 15c to 25c range for underlying earnings.

"However, there are significant uncertainties in the last quarter – for example, how quickly the foodservice sector recovers, the timing of shipments, and how the broader economic downturn will impact our business," he said.

Chairman John Monaghan said the lower milk price forecast was in response to a softening demand, relative to supply, which was pushing down prices.

"On the supply side, the EU and the US have just been through the peak of their season and that milk is flowing into export markets and increasing competition for sales. As a result, prices are softening across the board," he said.

"This supply and demand imbalance has impacted GlobalDairyTrade (GDT) prices for the products that determine our farmgate milk price.

In US dollar terms, GDT prices for whole milk power have fallen by 17 per cent since late January.

"Looking out to next season, a global recession will continue to reduce consumers' purchasing power," he said.

The pandemic had clouded the outlook for dairy prices for the next 15 months.

The wider range reflected the increased uncertainty faced in the coming season.