Can Fonterra keep the milk price above 30 euros?

Base remains in place in March 
The 2016 season got off to a slightly better start. The opening bid was NZ$4,75, then the base price rose to NZ$5,25 to reach NZ$6 in November. That foundation will remain in place in March. Which amounts to 28,56 euros per 100 kg of milk. Dairy farmers owe this mainly to stable demand and relatively constant prices.

Which means that the red numbers, those in the latest auctions  Global Dairy Trade (GDT) dominate, at least leave the base price alone for now. However, it does not mean that Fonterra is immune to the trend change. This trend break means that prices have been under pressure since the turn of the year. For example, the dividend is reduced from NZ$0,50 to NZ$0,60 per kg MS dividend to NZ$0,45 to NZ$0,55 per kg MS. It yields a total price of 6,45 to 6,55 NZ dollars per kg MS, 30,70 to 31,18 euros per 100 kg of milk, at 4 percent fat and 3,3 percent protein.

Despite the reduction in the dividend, the total price remains above a price of 30 euros per 100 kg of milk. Which does not alter the fact that this is a reduction of approximately 24 cents per 100 kg of milk. 'The impact of more volatility on product flows is reflected in the results of the ingredients section. It results in shrinking margins. Added to this are the extra liters of milk that autumn brings. It could put pressure on revenues in the second half of the year.”  

Autumn soothes the pain
Fonterra indicates that it is positive about everything, but at the same time remains cautious. This was, among other things, the reason to pay dairy farmers a larger advance in advance. Good news, because the lower milk production in the spring has also had an impact on the returns of dairy farmers. For example, Fonterra started the year with the expectation of collecting 7 percent less milk, due to setbacks in the spring. In the meantime, the good autumn has eased the pain somewhat and Fonterra has adjusted its forecast to a minus of 3 percent.        

Overall, revenues rose 5 percent to NZ$9,2 billion. EBIT fell 9 percent to NZ$607 million, while profit after tax rose 2 percent to NZ$418 million. The 'consumption and food service' division managed to increase EBIT by 30 percent, while ingredients recorded a decline of 17 percent. During the course of the season, the dairy company managed to move another 227 million liquid milk equivalents (LME) towards the food service. The so-called high margin products.

The advice is to be careful
Fonterra advises its dairy farmers to be careful. Although the company is confident in the milk price, it is difficult to say things with certainty due to the large fluctuations in prices.   

1 NZ dollar = 0,6521 euros  

* Graph based on the exchange rate at that moment