China pushes Fonterra forecast price to record

Fonterra's expected base milk price at the opening of the new season is now between NZ $7,25 to $8,75 per kilo of milk solids (New Zealand dollars per 11,5 liters). Converted at current exchange rates, this amounts to an indicative forecast price of between €35,57 and €42,92 per 100 kilos of milk.

The global demand for dairy is growing, Fonterra explains, with China leading the way. The corona outbreak has even led to additional demand for dairy, Miles Hurell, CEO of Fonterra, said in a statement. According to him, Chinese consumers drink milk more often in their pursuit of a healthier lifestyle. The strong demand is offset by only limited growth in milk production worldwide.

Prognosis good, risks present
Although the prospects are good at the moment, Hurell mentions a number of factors that could negatively influence the milk price. First of all, there is the corona pandemic that is not over yet. National governments will gradually reduce their support packages, which could affect the economy in various sales areas and therefore result in lower demand. Volatile exchange rates can also affect trade flows. A high milk price may increase the supply of milk in the slightly longer term, which may disrupt the current relationship between supply and demand.

Solid financial results over the first 9 months of the financial year
In addition to the new price forecast for the coming season, Fonterra opened the books on the first 9 months of the 2020/2021 financial year, the period from August 2020 to April 2021. Fonterra managed to significantly increase its net profit. The net result for the first 9 months of the 2020/2021 financial year (excluding incidental items) increased by no less than 61% to NZ $587 million, which is equivalent to €350,62 million.

The biggest stimulus for the financial results was sales on the Chinese market. Moreover, the company was better able to convert milk into products with extra added value. As a result, margins in China increased from 21,5% to 28,6%. However, the company expects more pressure on margins in the coming period.

CEO Hurell indicates that margins were already thinning in the recently concluded third quarter (February to April). This is partly caused by rising milk prices. The higher purchasing prices cannot be passed on directly to the company's customers everywhere. Moreover, milk supply in New Zealand is traditionally at its lowest point. The company's fixed costs continue, which means that margins are always lower during this period. However, the company expects the pressure on margins to continue in the first quarter of the new financial year.