Fonterra foresees dairy price revival ahead

(Agrimoney) – Fonterra, the world’s top milk exporter, backed ideas of a revival in dairy values ahead – but the forecast did little to prevent a further drop in futures, leading to expectations of a price retreat at a key auction on Tuesday.

John Wilson, chairman at New Zealand-based Fonterra, said that there’s “an expectation that [dairy] prices will move up through the first half of 2016”, concurring with ideas by commentators such as French giant Danone and Rabobank analysts.

“We certainly expect it to start moving up over the coming months,” Mr Wilson said.

The comments came as the group, lifting guidance on its operational performance, stood by expectations of a drop of “at least” 5% in milk output in 2015-16 in New Zealand, the top exporting country, where it processes the vast majority of production.

It revealed a drop of 4.2% to 222.5 kilogrammes of milk solids in its own collections in October, the peak month for New Zealand output.

The cumulative total for the season, which started in June, was 527.9 kilogrammes of milk solids, a drop of 4.8%.

‘Another round of price falls’

Nonetheless, dairy futures extended a decline on the NZX exchange, where whole milk powder for December closed down $10 at a three-month low of $2,050 a tonne, down one-third from an early-October high.

The better-traded April 2016 lot dropped $50 to $2,200 a tonne, also a three-month low.

The declines come ahead of Tuesday’s GlobalDairyTrade auction, run by Fonterra, a twice-monthly series which is seen as a world price benchmark.

“Dairy futures prices have fallen an additional 10% or so since the last GlobalDairyTrade auction so we anticipate another round of falls on Tuesday,” said Tobin Gorey at Commonwealth Bank of Australia.

However, Mr Gorey added that Fonterra’s forecast of a drop of at least 5% in New Zealand milk output in 2015-16 “will eventually support prices”.

Improved performance

Indeed, Fonterra underlined that it had since August, because of lower milk volumes, cut by 146,000 tonnes the amount of product it expects to sell through GlobalDairyTrade over the next year.

“In addition, an increased portion of product is being sold through bilateral customer agreements for a premium on prices achieved on GlobalDairyTrade,” said Theo Spierings, the Fonterra chief executive.

An increase in processing capacity, combined with lower volumes of milk to handle, is allowing the co-operative to focus on manufacturing “higher returning products” – unlike previously, when  a squeeze on milk powder plant forced it to turn out the likes of casein and cheese, which offered lower margins.

Fonterra nudged higher by $0.05 to $0.45-0.55 its forecast for its earnings per share in its current financial year, with farmers to receive $0.35-40 per share in dividends, on top of payments for milk.

“While it is tough on farm due to low global milk prices, farmers will welcome the ongoing improvement in Fonterra’s performance delivering increased returns,” Mr Wilson said.

“Performance is well ahead of last year and we are hitting our targets on gross margins and operating and capital expenses.”