Providing an update on its current financial performance, the farmer-owned cooperative said innovation efforts and commercialisation of its IP will help it expand in the high-value nutritional sector. Efforts have included its recent Singapore launch of Nature, a cultured milk beverage fortified with added vitamins and Fonterra’s probiotics. This is targeting the gut health market, CEP Miles Hurrell noted.
“We’ve also developed our thinking on the role our dairy expertise can play in addressing cognitive health for all ages. Consumers are becoming increasingly aware of the importance of mental health, and we have plans to launch new consumer products for improving cognition, sight and stress over the coming months,” the chief executive revealed.
Hurrell said that despite ‘challenges’ in the third quarter the group continues to make progress towards its long-term strategy, which focuses on maximising the value of the milk produced by its farmer-owners.
Higher milk prices, global uncertainty impact operating margin
Looking to the coming year, the cooperative provided an opening milk forecast for 2022-3 of $8.25 - $9.75 per kgMS, with a midpoint of $9.00 per kgMS. This ‘strong’ operating forecast reflects ‘continued demand for dairy’ coupled with constrained global supply, Hurrell said. For the 2021/22 season, Fonterra has maintained its 2021/22 forecast Farmgate Milk Price of $9.10 - $9.50 per kgMS – at the midpoint this would be the highest forecast milk price in the co-op’s history.
“The long-term outlook for dairy remains positive, despite recent geopolitical and COVID-19 related events impacting global demand in the short-term. On the supply side, growth from key milk producing regions is expected to remain constrained as high feed, fertiliser and energy costs continue to impact production volumes. These demand and supply dynamics are expected to support dairy prices in the medium to long-term,” the chief executive noted.
However, his commentary did point to some concerns on the horizon, including the potential for further impacts from COVID-19, financial markets and foreign exchange volatility, global inflationary pressures, a tightening labour market, increasing interest rates, geopolitical events, as well as the possible impact on demand from higher dairy prices.
Certainly, some of these issues - alongside the increased price it is paying for milk - seem to have weighed on the group’s third quarter. For the nine months ending 30 April 2022, Fonterra’s sales volumes were down as a result of lower milk collections and the timing of sales due to short-term impacts on demand including the lockdowns in China, the economic crisis in Sri Lanka and the Russia-Ukraine conflict. Total Group normalised EBIT was $825 million, down $134 million reflecting lower sales volumes, continued pressure on margins from the significantly higher milk price, on-going COVID-19 disruptions, and the rapid decline of the Sri Lankan Rupee. This was also reflected in Fonterra’s Normalised Profit After Tax of $472 million, down $115 million and reported Profit After Tax of $472 million, down $131 million.
“We are actively managing the challenges arising from COVID-19 and other geopolitical and macroeconomic events. However, increasing market volatility and uncertainty, on-going supply chain disruptions and growing inflationary pressures have added increased complexity,” Hurrell noted.
Commenting on the rest of the year, Hurrell said the co-op is maintaining its forecast earnings guidance of 25-35 cents per share. “While favourable price relativities in the fourth quarter are positive for earnings, we expect continued pressure on our margins due to the higher milk price coupled with the normal seasonal profile of our business.”