Bakers prefer butter, helping prices soar
Consumers around the world are willing to pay more for products containing dairy and this is driving demand for butter and cream, says Fonterra.
High prices for those products also influence margins in the co-op’s food service business.
Fonterra has revised the forecast dividend range for the full 2017-18 year from 25-35c per share down to 15-20c per share.
Meanwhile it has revised this year’s farmgate milk price upwards by 20 cents to $6.75/kgMS. The forecast total cash payout for farmers increases to $6.90-$6.95/kgMS, the third highest payout this decade.
Wilson says the forecast farmgate milk price is good news for farmers but earnings are being hit by volatility.
“There are two critical elements to it,” Wilson told Dairy News.
“One is the prices moving between our milk price products and our non-milk price products – whole milk powder, butter, skim milk powder and anhydrous milk fat in particularly relative to cheeses, caseins and those products.
“It is clear with WMP, butter and AMF being strong that goes to milk price rather than earnings.”
The second element is that prices of products which go into the co-op’s food service business are staying a lot higher than historically. That decreases the margin in the business -- the advance ingredients business, consumer and food service.
Wilson says previously they had talked about a possible weakening heading into this time of year because more production was expected out of Europe.
“What we have seen is the market has stayed very balanced. And we have seen a strengthening in particular across the fat portfolio.
“That has meant we have lifted $6.55 - $6.65/kgMS. The challenge with that is we are getting this ongoing volatility in our earnings, to the frustration of our unit holders and shareholders.”
Ongoing volatility in earnings doesn’t reflect on internal business performance, he says. It reflects the significant shift in stream returns and significant lifts in pricing “which can have an impact on our ability to attract margins or maintain growth margins in our business particularly late in the season.”
Wilson also says higher milk price puts pressure on Fonterra’s earnings in a year which is already proving challenging due to the payment to Danone and the impairment of the co-operative’s Beingmate investment.
