Returns 'not good enough'
Fonterra leaders are making their case for offloading the co-operative's $3 billion consumer business, noting that its return on capital has been nowhere near respectable.
Last week’s Global Dairy Trade (GDT) auction, the first for 2021, recorded solid gains in whole milk powder (WMP) and fat product prices, building on gains in the two December auctions.
WMP prices, used by Fonterra to set its payout, sit at a 12-month high of US$3306/metric tonne.
Last month, Fonterra narrowed its forecast payout range to $6.70-$7.30/kgMS. ASB lifted its forecast to $7/kgMS. ASB senior economist Chris Tennent-Brown notes that last week’s GDT price rise built on gains of December that led to the bank lifting its forecast price.
He says WMP prices have now edged comfortably ahead of where they were a year ago.
“The contract curve remains flat and stable, so price gains aren’t being driven by short-term supply fears,” he told Rural News.
“The latest GDT result provides a buffer to our $7 forecast, and more of the same over the coming events could well see Fonterra narrow its forecast range.”
Gains on GDT auctions over the past two months are being mostly attributed to strong demand from China.
While most countries are still dealing with waves of Covid-19, China’s economy is bouncing back after weathering the Covid storm.
Fonterra said last month that China was continuing to recover well from Covid-19 and this was reflected in recent GDT auctions.
The co-op noted a strong demand from Chinese buyers for WMP.
“The impact of Covid-19 continues to play out globally, and we continue to have a watchful eye on the increasing Northern Hemisphere milk production and New Zealand dollar,” said Fonterra chief executive Miles Hurrell.
“However, we have contracted a good proportion of our sales book for this time of the season, which has given us the confidence to narrow and lift the bottom end of the forecast farmgate milk price range.”
New Zealand milk production also impacts GDT prices; a drop in production can spark supply fears.
Data released in late December by the Dairy Companies Association of New Zealand (DCANZ) showed NZ November milk production was down 2.5% on a tonnage basis and down 2.7% on milksolids basis on November 2019.
