$7-plus milk price locked in

But Keall believes global dairy prices need to gain a bit more ground to reach the $7.50/kgMS mid-point announced by Fonterra recently.

Earlier this month Fonterra revised its forecast milk price range to $7 to $8/kgMS, adding that it reflects recent strengthening in demand for reference commodity products from key importing regions, including improvement in demand from China during the first quarter.

ASB is sticking to a forecast milk price of $7.35/kgMS. Keall told Rural News that a milk price of $7.50 is definitely possible, but prices would need to gain a bit more ground to get there.

“If prices are flat, or we get a couple more falls then we’ll be in for a lower number. At this stage, we reckon that about 50-60% of product for the season has been priced and about 80-90% of Fonterra’s currency hedging has been completed. So a big chunk of uncertainty has gone, but the prices Fonterra secures for that last 40-50% of product can still move the milk price a bit.

“It is very much looking like there will be a $7 on the front though – you’d need a dramatic move to shake that.”

Keall also noted that the Chinese domestic economy is still quite weak.

“Forecasters have lifted their expectations for growth over the next twelve months, but we’re still talking about +4.5% or so instead of +8% or more, which is what we’ve gotten used to over the past couple of decades.”

He says recent dairy auction gains can support this season’s farmgate milk price, but more action from Chinese buyers is needed to keep up the momentum.

Keall also noted that China took only around a third of the whole milk powder on offer at the latest Global Dairy Trade (GDT) auction, and buying activity remains below its typical proportions – and a far cry from the levels seen during the last two or three seasons.

“In the near term, I think demand will remain pretty subdued. However, I’m hopeful we can see some continued improvement as we get closer to next season, particularly if markets are correct that the global economy is heading for a soft landing,” he says.

“I’m expecting modest supply growth at a global level, but at this stage costs are still relatively high and prices relatively low, so I’m not anticipating a surge.”

Fonterra chief executive Miles Hurrell noted that GDT prices have lifted, and the co-op’s sales book is also well contracted for this time of year, giving the co-op confidence to increase the forecast farmgate milk price.

Strong First Quarter

Fonterra also reported strong earnings for the first quarter due to improved performance in all three of its sales channels.

“As a result, we have lifted the midpoint of our forecast earnings for the year up 5 cents per share, with the range moving from 45-60 cents per share to 50-65 cents per share,” says chief executive Miles Hurrell.

Fonterra’s profit after tax is up 85% on this time last year to $392 million, equivalent to 24c/share. EBIT is up 63% to $575 million.

These earnings are from continuing operations and exclude the performance and impact of selling DPA Brazil.

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%.