Words by: Amy Castleton

Fonterra announced its 2019-20 results in mid-September. The co-op has returned to profit, illustrating that its refreshed strategy has been the right move. Fonterra made a profit of $659 million, up $1.3 billion from the previous financial year.

Fonterra did make several comments in its announcement that illustrated the second half of the year was much more difficult than the first half, owing to impacts from the pandemic. It does remain cautious, noting the outlook remains uncertain as the market continues to react to Covid-19.

Fonterra confirmed its 2019-20 farmgate milk price at $7.14/kg milksolids (MS), and a dividend of five cents, bringing the total cash payout to $7.19/kg MS. This is the highest milk price Fonterra has paid since the 2013-14 season. Earnings per share were 24c, meaning Fonterra has retained 19c. However, this will allow the co-op to pay down a significant amount of debt, keeping it in good shape in the uncertain economic climate.

Fonterra also announced a forecast dividend for the 2020-21 of 20 to 35c per share. And it has maintained its milk price forecast at $5.90-$6.90/kg MS.

The NZX milk price forecast for last season had ended up at $7.09/kg MS, closely aligned with Fonterra’s actual payout. Our forecast for the 2020-21 season currently sits at $6.78/kg MS, near the upper end of Fonterra’s forecast range.

The 3.6% lift in prices at the September 15 Global Dairy Trade (GDT) event has supported the NZX milk price. The forward view using prices for dairy commodity futures on the NZX Dairy Derivatives market is also reasonably positive at the time of writing, with some increases expected through the remainder of NZ’s dairy season.

Pricing for commodities will start to be more influenced by NZ milk production over the next few months as we make our way through spring. At this stage we look to be doing well, with cows in good condition and soil moisture much improved.

Milk supplies are also growing significantly in Australia and the United States, while the European Union is tracking relatively flat and South America is mixed. Argentine milk production has been growing, though no doubt economic factors will start to have some impact. Poor weather, along with the struggle to keep Covid-19 contained, has seen milk production fall in Brazil.

All in all there is plenty of milk to go around. However demand remains volatile. It’s difficult to predict whether businesses will be able to operate and what demand will be at the consumer level, making both buying and selling difficult. Demand remains stronger for milk powders than for milk fats, as this part of the market is a little more stable. Chinese demand pulled back a little at the September 15 GDT event, notably for whole milk powder. However we expect this indicates China has completed its buying to enter product into the country after January 1. From January 1 a 0% tariff applies to NZ-sourced milk powder, up to a safeguard level of 179,137 tonnes. China had started its typical buying for this earlier than usual this year, to ensure there were no supply chain issues due to the pandemic.

  • Amy Castleton, senior dairy analyst at NZX Agri.