Fonterra lifts milk price forecast, economy in for $13.2b boost

Fonterra posts 2022 first quarter results. Photo / File

The economy is in line for a $13.2 billion injection from Fonterra this dairying season with the big co-operative raising its forecast milk price range to a plump $8.40-$9/kg milksolids.

Posting its first-quarter 2022 results, New Zealand's biggest business said the lift in the 2021-2022 season forecast was from the previous outlook of $7.90-$8.90, and increased the midpoint of the range, which its farmers are paid off, to a record $8.70.

Total ebit was $190m, down $60m on the corresponding period last year, due to significantly higher input costs driven by a 30 per cent increase in whole milk powder prices.

A higher forecast milk price at this level can put pressure on margins and therefore earnings, prompting a revision of earnings guidance to 25-35c per share, from 25-40c, said chief executive Miles Hurrell.

He said the raised forecast was the result of consistently strong demand for dairy at a time of constrained global supply.

The 60c range on the new forecast milk price was due to concerns about new Covid variants, potentially more resistant to vaccines.

Fonterra's New Zealand milk supply was down around 3 per cent on this time last season.

However, the farmer-owned co-operative expected with improving weather, milk collections for this season would be generally on par with last season, supporting a forecast of 1525m kg milk solids.

Demand had softened slightly in Fonterra's biggest market China, but global demand remained strong and Hurrell anticipated that would remain the situation for the short to medium term.

Sales volumes were stable in the food service business but the high milk price had squeezed margins.

The Chilean business, which is being divested, continued to improve but tightening margins and weaker local currency in other markets had impacted the consumer business.

"In our ingredients channel [business] we're seeing margins in our longer-term pricing contracts return to more normal levels, which has helped push total group gross margin up from the last quarter last year," said Hurrell.

Operating spend was down 2 per cent on the first quarter last year.

Work was under way on the sale of the Chilean business and ownership review of the Australian business. Advisers had been appointed to assist with both processes.

"Dependent on the outcome of these processes, we intend to return around $1 billion of capital to our shareholders and unit-holders by FY24."

Jarden head of research Arie Dekker said first-quarter earnings were "solid in the circumstances".

"While [Fonterra] is acknowledging that it is likely to struggle to generate earnings growth again in FY22, we do not view this as a halt in the turnaround, but rather reflects the inescapable impact milk price will have on year-to-year earnings, something that the strategy to further diversify into higher-value products should help with over the longer term," Dekker said in a market note.

"EPS (earnings per share) was 16c in FY19, increasing to 34c in FY21 with milk price over that period growing from $6.35 to $7.54/kg milksolids."

Hurrell said the reset business strategy focus on New Zealand milk was paying off.

Fonterra had recently launched its Mainland cheese range in Dubai's largest supermarket chain. It had completely sold out.

The range could be launched in other countries.