Fonterra sets 2021/22 opening farm milk price forecast and company performance updates

Fonterra today announced a farm gate milk price range for the 2021/22 season of $ 7.25 to $ 8.75 per kgMS, with a midpoint of $ 8 per kgMS.

It also reduced its planned Farmgate milk price range for 2020/21, reducing the midpoint by 5 cents to $ 7.55 per kgMS, and reported a strong performance for the nine months ending April 30, 2021. However, he warns that there will be significant pressure on profits in the last quarter of the year due to the normal seasonal pattern of activity combined with squeezing margins.

CEO Miles Hurrell said the improving global economic environment and strong demand for dairy products, relative to supply, is behind the co-op’s $ 8 midpoint relative to its price range. milk to the farm scheduled for 2021/22.

“At this point, the co-op would contribute more than $ 12 billion to the New Zealand economy next season.

“Global demand for dairy products, especially New Zealand dairy products, continues to grow. China is leading the charge as its economy continues to recover strongly. At the behest of COVID-19, people are researching the health benefits of milk and customers want to secure their supply of New Zealand dairy products and ingredients.

“The growth in global milk supply appears to be moderate and the global supply of whole milk powder appears to be limited.

“Based on these supply and demand dynamics, as well as the position of the New Zealand dollar against the US dollar, we expect whole milk prices to remain at current levels for the near future.

“Over the next 18 months there are a number of risks, which is why at this early stage we have this wide range on our farm milk price forecast. Some of the major risks include: COVID-19, which is far from over; the effects of governments withdrawing from their economic stimulus plans; currency volatility; changes in supply and demand patterns that can enter dairy markets when prices are high; and as always, the potential impacts of any geopolitical issue around the world. “

After selling most of its milk for the 2020/21 season, Fonterra is now able to reduce the expected Farmgate milk price range this season from $ 7.30 – $ 7.90 per kgMS to $ 7.45 – $ 7.65 per kgMS.

Hurrell says that at a midpoint of $ 7.55, 2020/21 would be the second year in a row with a farm gate price of milk above $ 7 per kgMS.

“Since March we have seen prices stabilize somewhat, which is why we have revised our midpoint down to 5 cents. In this extraordinary March GDT event, where prices jumped 15% and contributed to our expected 2020/21 farm gate price range increase, the average whole milk powder price was over US $ 4,350 per metric tonne. In the past three GDT events, however, the average price has fallen to nearly $ 4,100 per metric tonne. And GDT butter prices have fallen from nearly $ 6,000 per metric tonne to less than $ 5,000 per metric tonne for the first time since January. “

Company performance

For the nine months ended April 30, 2021, Fonterra delivered normalized after-tax net income of $ 587 million, up 61% year-over-year, reflecting improved underlying business performance of the cooperative and a stronger balance sheet. Reported after-tax net income was $ 603 million, up 2%.

Fonterra group’s total normalized profit before interest and taxes (normalized EBIT) increased 18% to $ 959 million, due to higher margins and lower operating expenses.

Hurrell says the challenges of COVID-19 are still a part of the lives of co-op employees and customers around the world.

“It’s too easy to forget that if you’re sitting here in New Zealand – but today’s results show that despite these challenges, we’ve improved our financial performance. Over the past three months, we’ve also made a commitment to phase out charcoal by 2037 and have made promising progress in a trial using algae in cow feed to reduce emissions.

“I want to thank all of our employees for delivering another strong set of results, as well as our farmer owners for their high quality New Zealand milk and continued support. I couldn’t be more proud of the way our employees and our farmers work together.

“Greater China continues to be an important player for us, with normalized EBIT of $ 457 million year-to-date, up 30% or $ 106 million year-on-year. Foodservice, again, was the primary driver of this result, contributing $ 93 million to growth. In the third quarter, the team continued to improve on the strong gross margins we saw in foodservice in the half year by shifting milk to higher value products, for example cream cheese. As a result, the year-to-date margin fell from 21.5% to 28.6%.

“Asia-Pacific normalized EBIT of $ 224 million decreased 10% or $ 24 million. While consumers improved by 29% and food services by 89%, this was offset by ingredients which were affected by price mismatches on sales contracts with customers, delaying our ability to pass on the price. increase in our input costs.

“AMENA’s normalized EBIT of $ 322 million declined 11% or $ 40 million, primarily due to lower ingredient sales volumes as we continue to make the most of one of our strengths, namely our ability to move milk to higher value products and markets. However, AMENA Consumer and Foodservice continues to perform well, maintaining year over year improvement in gross margins. “

Hurrell says the co-op’s continued financial discipline is also a big part of its third quarter performance story.

“Fonterra’s operating expenses are down 5% year-to-date, but we anticipate additional spending in the last quarter to support our brands and product initiatives for next year. Our debt reduction over the past two years and lower interest rates have reduced our interest bill by $ 69 million for the nine months ending April 30, 2021. ”

Revenue Outlook

Fonterra maintains its normalized earnings forecast of 25 to 35 cents per share. While year-to-date normalized earnings per share are 34 cents, the co-op expects fourth-quarter earnings to come under further pressure and says full-year profits are expected to rise. more towards the middle of the range.

Hurrell says there are clouds on the horizon when it comes to Fonterra’s earnings performance.

“While overall we have seen stronger gross margins so far this year, they narrowed in the third quarter as higher raw milk prices impacted our costs of inputs and price mismatches on sales contracts with customers have delayed our ability to go through the increase in our input costs.

“As a result, we expect increased pressure on margins in the fourth quarter. This is compounded by the normal seasonal profile of our business, where we have our ongoing fixed costs, but lower volumes of milk processed and sold. All of this means that the fourth quarter will be difficult from a profit perspective and we expect the pressure on margins to continue into the first quarter of fiscal 2022. ”

Portfolio review update

At the start of fiscal 2019, Fonterra presented its initial three-point plan to turn around the business. Part of this involved a strategic review of our assets which led, among other things, to the cooperative’s decision to sell its investment in Beingmate Baby & Child Food Company Ltd (Beingmate) and its Chinese farms.

During the third quarter, Fonterra finalized the sale of its stake in Beingmate, marking the full exit of its investment in the company and finalized the sale of the two Chinese agricultural hubs wholly owned by Fonterra to Ying and Yutian.

In October 2020, Fonterra announced that it had agreed to sell its 85% stake in its Hangu farm in China to Beijing SanyuanVenture Capital Co., Ltd. (Sanyuan), for 42 million dollars (190 million RMB *). Sanyuan owns a 15% minority stake in the farm and has exercised its right of first refusal to purchase Fonterra’s stake. Due to the lack of progress in accepting the specific terms of the sale, the right of first refusal was terminated earlier this month and Fonterra will now seek to open the sale process to a larger group of potential buyers. .

Hurrell says the progress that has been made in the portfolio review allows Fonterra to truly focus on its strategy of growing the value of New Zealand milk by using innovation, sustainability and efficiency to deliver products appreciated by customers.

“It starts with having the best milk in the world – our New Zealand milk – and having a more focused asset portfolio allows us to further prioritize our resources around it and we can see that materialize in our performance. “

* based on RMB to NZD conversion rate of 4.5

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