Global milk glut and weather reasons for reduction in Fonterra’s farmgate milk price
Fonterra said its reduction in farmgate milk price and drop in margin by €14 million for the first quarter of 2018 is due to the surge in global milk supply and adverse weather conditions.
Fonterra Co-operative Group revised its 2018/19 forecast Farmgate Milk Price range from $6.25-$6.50 per kgMS to $6.00-$6.30 per kgMS.
Fonterra Chairman John Monaghan said the revision in the forecast Farmgate Milk Price range is due to the global milk supply remaining stronger relative to demand, which has driven a downward trend on the GlobalDairyTrade (GDT) index since May.
“Since our October milk price update, production from Europe has flattened off the back of dry weather and rising feed costs. US milk volumes are still forecast to be up one per cent for the year,” says Mr Monaghan.
“Here in New Zealand, we are maintaining our forecast collections at 1,550 million kgMS. NIWA is saying its likely we will see an abnormal El Nino weather pattern over summer and this could impact our farmers’ milk production.
“Demand from China and Asia remains strong. However, we are seeing geopolitical disruption impacting demand from countries that traditionally buy a lot of fat products from us.
“Today’s forecast range assumes dairy prices will firm across the balance of the season. This is consistent with the views of other market commentators.
“There are still a number of unknowns in the global demand and supply picture and we recommend farmers budget with ongoing caution. Fonterra’s Advance Rate has been set off a milk price of $6.15 per kgMS.”
Fonterra’s first quarter gross margin of $646 million is down $14 million compared to the same period last year and up slightly on a percentage basis from 16.6 per cent to 17 per cent. Revenue of $3.8 billion, is down four per cent and sales volumes were down six per cent to 3.6 billion liquid milk equivalent (LME).
Chief Executive Miles Hurrell says the Co-op generally makes a smaller proportion of its total annual sales in the first quarter due to the seasonal nature of our milk supply.
“This means the results from Q1 do not give much insight into the Co-op’s expected earnings performance for the full year. It does, however, put the spotlight on where we have challenges that we need to address,” says Mr Hurrell.
“In particular, we are seeing challenges in our Australian Ingredients, Greater China Foodservice and Asia Foodservice businesses. I want to be clear with our farmers and unit holders about how we are tackling these issues.
“In our Australian Ingredients business, we have lower milk collections as a result of drought conditions and increased competition for milk supply. We are responding by focusing on the performance levers in our control – the main one being reducing our operating expenses to reflect lower milk collections.
“The lower gross margins and sales volumes in Greater China Foodservice and Asia Foodservice in Q1 are mainly due to the high sales volumes of butter and cream cheese at the end of Q4 2018, a slightly slower start to sales of UHT culinary cream and more sales of UHT milk which has a lower margin relative to our other products.
We are expecting our sales to lift as we are seeing strong sales from our distributors off the back of demand in China for New Zealand made products, particularly our UHT culinary creams. We are also prioritising value and moving away from lower margin contracts.”
In respect to the three-point plan to lift the Co-op’s performance, Mr Hurrell says progress is being made on fixing the businesses that are not performing.
“Fonterra Brands New Zealand is one of the businesses that is starting to turn around. It’s early days but overall our Consumer and Foodservice business in Oceania delivered higher sales,” he pointed out.
“We remain committed to returning our operating expenses (OPEX) to FY17 levels – however, they were up three per cent for the first quarter compared to the same period last year. The majority of these costs were committed to before I set our new OPEX target.
“They relate to higher advertising and promotion and storage costs in our Consumer and Foodservice business, additional costs since taking the management of Anmum back from Beingmate and higher storage and distribution costs for Ingredients as we collected and moved more milk than we budgeted for.”
Outlook for 2019
Mr Hurrell says the Co-op is maintaining its forecast earnings per share range of 25-35 cents.
“Q1 gross margin percentage was up on last year and we have identified the challenges that need addressing. Our earnings forecast for the remainder of the year is based on a milk price within the $6.00-$6.30 per kgMS range and, on this basis, we are confident in our earnings guidance.”