Fonterra Cooperative Group, the world’s biggest dairy exporter, forecast a record milk price for the new season amid strong global demand.
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Auckland-based Fonterra on Thursday raised the midpoint of its 2022-23 forecast range by 50 NZ cents to NZ$9.50 ($6) a kilogram of milksolids, which would be the highest price it has ever paid to its 10,000 New Zealand farmer shareholders. It also issued earnings guidance of 30-45 NZ cents per share for FY23, up from 25-35 cents for the current year ending July 31.

“The strong earnings guidance for next financial year reflects an expected recovery in some of the Co-op’s key markets, which have experienced margin pressures this financial year, coupled with ongoing favorable Ingredients margins,” Chief Executive Officer Miles Hurrell said in a statement. “While the Co-op is in the position to be forecasting both solid earnings and a healthy milk price for the next year, significant volatility remains.”

If achieved, the 2022-23 milk price will surpass the Co-op’s forecast midpoint for the 2021-22 season of NZ$9.30. Fonterra normally confirms the season payout at its full-year results announcement in September.

Dairy prices have soared along with other commodities as the world grapples with supply constraints, while the weaker New Zealand dollar should also boost the nation’s export receipts. But higher prices also increase Fonterra’s input costs, putting pressure on its margins.

“Interest rates and inflation have lifted well above our assumptions, as have commodity prices in response to the continued strong demand for dairy,” Hurrell said. “These input cost increases are impacting the cost of our debt in the short term and have also pushed on-farm costs up.”

As the higher milk prices lift working capital, Fonterra’s overall debt position has the potential to trend higher, he said.

Falling dairy prices are a double-edged sword that benefits consumers and manufacturers, but pinches farmers’ margins and threatens additional challenges later in the year, cautioned Mike McCully, independent dairy consultant for The McCully Group, shared during a recent Dairy Deli Bakery Association webinar.

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