Fonterra expects to pay its farmer suppliers a record price for their milk this season, providing a boost to the economy of $13.8 billion.
Fonterra has lifted its forecast milk payment to farmers for this season to a new record level, which it expects will contribute $13.8 billion to the economy.
The co-operative on Tuesday lifted its forecast for the 2021/22 season a third time, and is now expecting to pay its farmer suppliers between $8.90 and $9.50 per kilogram of milk solids. That’s up from its forecast in early December of between $8.40 and $9 per kgMS.
The midpoint of the range, which farmers are paid off, increased to $9.20 per kgMS from $8.70 per kgMS, which would be the highest level since Fonterra was formed in 2001. The co-operative paid farmers $7.54 per kgMS last season, and its previous record was $8.40 per kgMS in the 2013/14 season.
Global dairy prices hit an eight-year-high at auction last week, as tight milk supply stokes demand for New Zealand’s biggest export commodity. Prices have been supported this season by weaker milk production in New Zealand and overseas, hindered by poor weather and higher feed costs.
* Fonterra reduces milk collection forecast due to ‘challenging growing conditions’
* Dairy prices hit 7-year high on Global Dairy Trade auction as tight milk supply underpins demand
* Fonterra lifts farmgate milk price to record level; sees $13.2b economic boost
“The increase is the result of consistent demand for dairy at a time of constrained global milk supply,” said Fonterra chief executive Miles Hurrell.
“In general, demand globally remains strong – although, we are seeing this vary across our geographic spread.
Fonterra factors in fat and protein levels in milk when buying it off farmers.
“Overall, global milk supply growth is forecast to track below average levels, with European milk production growth down on last year and US milk growth slowing due to high feed costs. It’s a similar supply picture in New Zealand.”
Earlier this month, Fonterra lowered its forecast for the amount of milk it expects to collect this season by 1.6 per cent to 1.5 billion kilograms of milk solids due to challenging pasture growing conditions.
Strong global demand for New Zealand primary products has helped the economy remain resilient during the Covid-19 pandemic and is helping offset losses from the tourism industry which has been hurt by border closures.
“Dairy, and primary prices more generally, are a very strong positive for the economy at present,” BNZ senior economist Craig Ebert said in a note following Fonterra’s announcement.
Ebert said there were “strong signals” that high prices would continue into next season, as supply was constrained across the major exporters including New Zealand, the US and the European Union.
As the country’s biggest processor, Fonterra’s payment sets the benchmark for its competitors. However economists have warned that farmers are also facing higher costs, which is taking some shine off the forecast for a record payment.
Higher milk prices can also squeeze profit margins for milk processors like Fonterra unless they can sell their products at higher prices as well.
Hurrell noted that while the higher forecast farmgate milk price put pressure on the company’s margins in its consumer and foodservice businesses, prices in its ingredients business were favourable for milk price and earnings at this stage.
As a result, Fonterra remained comfortable with its 2021/22 earnings guidance of 25-35 cents per share, he said.
The co-operative was keeping a close eye on growing inflationary pressures impacting operational costs, and the increased potential for volatility as a result of high dairy prices and economic disruptions from Covid-19, particularly as governments respond to the rapid spread of the Omicron variant, he said.