Fonterra Cooperative Group raised its forecast farmgate milk price for the 2018 and 2019 seasons while cutting its projected dividends for 2018, saying rising global dairy prices are squeezing margins.
The Auckland-based company raised its forecast milk price for the current season by 20 cents to $6.75 per kilogram of milk solids and gave an opening price forecast for 2019 of $7/kgMS, saying global demand for dairy products "is expected to remain strong" especially in China and for butter and anhydrous milk fat in particular.
However, higher prices are a two-edged sword for Fonterra, which counts milk as an input cost. The company cut its forecast dividend range for the current year to a range of 15-20 cents a share, from a previous forecast of 25-35 cents. Its normalised earning per share guidance was lowered to a range of 25-30 cents.
Units of the Fonterra Shareholders' Fund, which are entitled to the dividends from the company's shares, last traded at $5.74 and have fallen 5 percent in the past 12 months while the S&P/NZX 50 Index rose 16 percent.
"Fonterra's opening milk price of $7 is very aggressive but is reflective of where the market is currently sitting," said AgriHQ chief analyst Susan Kilsby. "The challenge will come in the market maintaining its current strength throughout the season ahead. We are seeing the growth in global milk flows slow a little as lower milk prices in other parts of the world take their toll on production. This slowdown in global milk is supportive to returns to NZ dairy processors and our farmers."
Chief executive Theo Spierings said the timing of the rise in milk prices made it particularly challenging this year.
"There is always a natural lag in being able to pass through an increase in our input costs," he said in a statement. "But this increase has been both rapid and late in the year, making it difficult for these higher costs to flow through into our sales for this financial year. Against this backdrop, we can see our sales margins are not where they need to be at this point in the year to achieve our original earnings forecast."
Fonterra had less product to sell in its first half in a season that started with record low inventory, followed by low spring milk collection in New Zealand because of unfavourable weather, it said. The company had been hoping for an earnings pickup in the second half which hadn't eventuated. Total volume in the first nine months of the year fell 5 percent to 16 billion liquid milk equivalents and its gross margin shrank to 16 percent from 18 percent in the same period a year earlier, it said.
Weaker earnings compounded the impact of the $405 million writedown in the carrying value of its investment in Beingmate Baby & Child Food and the $183 million settlement with Danone that led to a first-half loss and would result in Fonterra's gearing ratio rising above its target range of 40-45 percent, it said. Fonterra would move back within the target range next year, it said.
For the 2018/19 season, Fonterra expects New Zealand milk collection to rise 1.5 percent to 1.525 million kgMS. However, it also expects increased supply out of the EU, US, Australia and Argentina.