Market View - Fonterra returns to profit

UPFRONT MARKET VIEW

Fonterra returns to profit

Words by: Amy Castleton

Fonterra announced its 2019-20 results in mid-September. The co-op has returned to profit, illustrating that its refreshed strategy has been the right move. Fonterra made a profit of $659 million, up $1.3 billion from the previous financial year.

Fonterra did make several comments in its announcement that illustrated the second half of the year was much more difficult than the first half, owing to impacts from the pandemic. It does remain cautious, noting the outlook remains uncertain as the market continues to react to Covid-19.

Fonterra confirmed its 2019-20 farmgate milk price at $7.14/kg milksolids (MS), and a dividend of five cents, bringing the total cash payout to $7.19/kg MS. This is the highest milk price Fonterra has paid since the 2013-14 season. Earnings per share were 24c, meaning Fonterra has retained 19c. However, this will allow the co-op to pay down a significant amount of debt, keeping it in good shape in the uncertain economic climate.

Fonterra also announced a forecast dividend for the 2020-21 of 20 to 35c per

Packing milk powder at Fonterra’s Pahiatua plant. Demand remains stronger for milk powders than for milk fats. 7.75

7.50

7.25

NZX Seasonal Farmgate Milk Price forecast

7.00

6.75

6.50

6.25 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 2019-20 Source: NZX

share. And it has maintained its milk price is mixed. Argentine milk production has forecast at $5.90-$6.90/kg MS. been growing, though no doubt economic

The NZX milk price forecast factors will start to have some impact. for last season had ended Poor weather, along with the up at $7.09/kg MS, closely struggle to keep Covid-19 aligned with Fonterra’s contained, has seen milk actual payout. Our production fall in Brazil. forecast for the 2020-21 All in all there is plenty of season currently sits at milk to go around. However $6.78/kg MS, near the demand remains volatile. It’s upper end of Fonterra’s difficult to predict whether forecast range. businesses will be able to operate

The 3.6% lift in prices at the Amy Castleton. and what demand will be at the September 15 Global Dairy Trade consumer level, making both buying (GDT) event has supported the and selling difficult. Demand remains NZX milk price. The forward view using stronger for milk powders than for milk prices for dairy commodity futures on fats, as this part of the market is a little the NZX Dairy Derivatives market is also more stable. Chinese demand pulled back reasonably positive at the time of writing, a little at the September 15 GDT event, with some increases expected through the notably for whole milk powder. However remainder of NZ’s dairy season. we expect this indicates China has

Pricing for commodities will start to be completed its buying to enter product into more influenced by NZ milk production the country after January 1. From January over the next few months as we make 1 a 0% tariff applies to NZ-sourced milk our way through spring. At this stage powder, up to a safeguard level of 179,137 we look to be doing well, with cows in tonnes. China had started its typical good condition and soil moisture much buying for this earlier than usual this improved. year, to ensure there were no supply chain

Milk supplies are also growing issues due to the pandemic. significantly in Australia and the United States, while the European Union is • Amy Castleton, senior dairy analyst at tracking relatively flat and South America NZX Agri.