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$13b boost for dairy farmers

Tina Morrison and Bonnie Flaws

Fonterra has raised its forecast milk payment to farmers for this season to match its previous record high, as demand for dairy holds up while supply tightens.

The co-operative lifted and narrowed its forecast farmgate milk price range for the 2021/22 season to between $7.90 and $8.90 per kilogram of milk solids, from $7.25 to $8.75 per kgMS.

The midpoint of the range, which farmers are paid off, increased to $8.40 per kgMS, from $8 per kgMS. That would match the previous record paid in the 2013/14 season and would see almost $13 billion flow into regional New Zealand.

New Zealand is heading into its peak milk production period in late spring and output so far is below last season, constrained by poor weather and limits on expansion. Milk production is also soft elsewhere, due to poor weather and high feed costs. At the same time, demand is holding up and Fonterra is looking to move more of its milk into higher value products, boosting profitability.

‘‘We have seen demand from China ease over the past couple of months, while other regions have stepped in to keep demand firm,’’ chief executive Miles Hurrell said. ‘‘On the supply side, overall global milk supply growth is forecast to track below average levels, driven by a slowdown in US production due to the increased cost of feed.

‘‘These supply and demand dynamics are supporting the current pricing levels, and a higher contract rate has given us the ability to narrow the forecast range.’’

Fonterra chief financial officer Marc Rivers said while Chinese buyers had pulled back over some of the recent Global Dairy Trade auctions after prices surged higher, they had returned at the most recent event.

There may have been an element of ‘‘playing chicken’’, with buyers securing inventory early and then waiting to see if prices would settle, then having to return to the market to replenish stock, he said.

Fonterra continued to see fairly steady consumer demand in China, he said.

Still, higher milk prices, while beneficial for farmers, can squeeze profit margins for milk processors like Fonterra unless they can sell their products at higher prices.

Hurrell said that while the increase in milk price can put pressure on the co-operative’s input costs, Fonterra remains comfortable with its current 2021/22 earnings guidance range of 25-40 cents per share. However, he noted it was still early in the season and a lot could change.

Increased volatility was more likely when prices were high and that’s why the co-operative maintained a range in its milk price forecast, he said. It was keeping an eye on things that could impact the demand, including Covid-19, inflation pressures, exchange rate volatility and weather conditions as well as the effect of any geopolitical issues.

Fonterra’s advance rate scheme spreads risk from fluctuating global dairy prices across the year by breaking up payments to farmers based on the forecast farmgate milk price. Without the scheme, the cooperative would require more equity.

By July 31 each year the cooperative has paid 85 per cent of the milk price forecast to suppliers. After the annual results are announced in September, a wash-up is done based on the actual results. Farmers receive three retrospective payments of 5 per cent each in August, September and October.

Business

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2021-10-27T07:00:00.0000000Z

2021-10-27T07:00:00.0000000Z

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