Fonterra holds milkprice steady

Fonterra has said the main purpose of the announcement was to give an indication of its earnings for the new financial year. Photo / Christine Cornege

Fonterra has stuck with its farmgate milkprice for 2016/7 of $4.25 per kg of milk solids and said it expected its earnings per share in the year ahead to be in a 50 to 60c range.

All up Fonterra expects the payout to farmers to be in a range of $4.75 to $4.85 per kg range in 2016/7.

Chairman John Wilson said the earnings per share range reflected performance improvements across the business, which would be welcomed by farmers. However, with the farmgate milk price forecast remaining at $4.25 per kg it was going to be another "financially challenging" season for farmers, he said in a statement.

The Co-operative is aware of how tough the situation on farm remains.

Fonterra chairman John Wilson

The co-op's opening farmgate milk price for the 2016/17 - announced in May - was $4.25 per kg of milk solids, up 35c from the previous season's, but still well short of the $5.25 a kg needed for farmers to break even.

Since then, GlobalDairyTrade (GDT) prices for wholemilk powder have dropped by US$126 a tonne to US$2079. Futures market pricing in recent days for this week's GlobalDairyTrade auction has indicated a rise. Wholemilk needs to US$3000 a tonne to put farmers back in black.

Chairman John Wilson said the solid forecast earnings per share range reflects performance improvements across the business and would be welcomed by farmers.

However, with the Farmgate Milk Price forecast remaining at $4.25 per kg, it is another financially challenging season for farmers.

"The Co-operative is aware of how tough the situation on farm remains," Wilson said in today's statement.

"We are focused on delivering as much cash as possible to our farmers by bringing payments forward while maintaining a strong balance sheet," he said.

Wilson said the $4.25 reflected the continuing global uncertainty and the high NZD/USD exchange rate which continued to affect the competiveness of New Zealand dairy exports.

We are seeing the benefits of our investments in manufacturing over recent years.

Fonterra chief executive Theo Spierings

The recent weakening of the Euro, combined with the continued strength of the New Zealand dollar, has meant a price advantage for European export dairy products, he said.

The total earnings per share forecast of 50-60 cents this season represented a slight upgrade from the 45-55 cents total earnings per share guidance for the 2015/16 season.

Westpac economists said their farmgate forecast for 2016/7 remained at $4.60, but that there remained some downside risk to that forecast.

"Although we expect dairy prices to improve gradually from late 2016 into 2017, the strong NZ dollar is likely to weigh on farm gate returns, while at the margin, whole milk powder prices have also been a little weaker than anticipated in the first couple of months of the 2016/17 season," Westpac said in a commentary.

Fonterra expects the global milk supply and demand to come into balance over the course of this season.

The co-op also expects farmers around the world to cut production. In New Zealand, Fonterra expects production to fall by 3 per cent this season.

Chief Executive Theo Spierings said the returns from the ingredients, consumer and foodservice businesses continued to grow in line with Fonterra's business strategy to convert more milk into higher returning products.

"We are seeing the benefits of our investments in manufacturing over recent years," he said.

"Our good progress in continuing to increase value through our consumer and foodservice businesses, particularly in important markets such as China, Malaysia, Indonesia, Sri Lanka, Oceania and Latin America, is reflected in the lift in the earnings per share forecast," he said.

Read the full Fonterra release here: