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Last week Fonterra narrowed its forecast milk price range to $7-$8/ kgMS.
Improved demand from China has helped push the forecast farmgate milk for the season by 25c.
But Fonterra cautions that it's still early in the season and things could change.
Last week Fonterra narrowed its forecast milk price range to $7-$8/kgMS, with a new mid-point of $7.50/kgMS.
Fonterra chief executive Miles Hurrell says the revised forecast reflects recent strengthening in demand for reference commodity products from key importing regions, including improvement in demand from China during the first quarter.
"Global Dair Trade prices have lifted, and our sales book is also well contracted for this time of year, giving us confidence to increase our forecast Farmgate Milk Price.
"It's still early in the year, with potential for further volatility in commodity prices, so we will continue to watch market dynamics closely and provide updates as needed," says Hurrell.
China, Fonterra's biggest market, has been struggling since harsh Covid lockdowns. While Chinese growth forecasts have recently been revised higher, output next year still looks likely to remain below the historical trend, says ASB economist Nat Keall.
He notes that since bouncing off their August lows, dairy prices have struggled to maintain momentum.
The overall Global Dairy Trade (GDT) index is currently around 17% off its lowest point but has essentially flatlined over the last four auctions.
"In short, the season is shaping up more constructively than we once feared, but prices remain cyclically low compared with where they averaged the last two or three seasons," he says.
"It's worth noting too that whole milk powder (WMP) offer volumes were reduced by close to 20% in last week's auction compared with the last one, so the gains probably aren't reflective of much increase in underlying demand.
"The WMP contract curve also shows that recent moves in prices have been predominantly concentrated in the front-end rather than among the latter dated contracts. That suggests buyers' expectations for the longer-run demand and supply balance haven't really changed."
Strong Performance
Fonterra also reported strong earnings for the first quarter due to improved performance in all three of its sales channels and lifted the midpoint of its forecast earnings for the year up 5c/share, with the range moving from 45-60 cents per share 50-65 cents per share.
Fonterra's profit after tax is up 85% on this time last year to $392 million, equivalent to 24 cents per share. EBIT is up 63% to $575 million.
These earnings are from continuing operations and exclude the performance and impact of selling DPA Brazil*.
Chief executive Miles Hurrell says higher margins across the Co-op's Ingredients, Foodservice and Consumer channels have driven the lift in earnings, with gross margin up from 15.5% this time last year to 21.4%.
"Our Foodservice and Consumer channel performance is due to improved margins as well as the co-op allocating more milk to these higher returning channels.
"We've also seen continued strong performance in New Zealand Ingredients, but lower margins in Australia Ingredients.
"Looking ahead, we expect these higher margins to continue throughout the first half of the year, before tightening across all three sales channels in the second half of the year."
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