Inflationary pressures spill over into milk market

Company News

by Glenn Dyer

Global milk prices have firmed this year and that means dairy farmers and consumers in NZ and Australia will have to learn to tolerate higher prices for milk, cheese and other dairy products, just as they are having to wear higher bread, meat and a host of other prices.

According to Fonterra, the world’s biggest dairy company (and NZ’s biggest company) the same factors driving up the prices of a growing range of products and services, are driving milk, cheese and other product prices higher as well.

So while the cliche urges ‘no crying over spilt milk’ – it could very well be a case of ‘taking it on the chin’ as dairy prices rise for farmers and in shops and supermarkets.

The strength globally could, if sustained, see returns to NZ dairy farmers reach new highs, meaning billions of dollars more to be pumped into the Kiwi economy.

Despite the better growing conditions here after the heavy rain and mild autumn (and plenty of pastures), the former world prices, higher costs (fertiliser, energy and fuel) will be felt here by farmers and consumers.

News of the rise in prices for NZ dairy farmers was contained in an update from Fonterra yesterday which also revealed new structures and staff changes.

Fonterra lifted its 2022/23 forecast Farmgate Milk Price range to $NZ8.75-$10.25 a kilogram of milk solids (kgMS), up from NZ$8.25-$9.75 a kgMS.

This increases the midpoint of the range, which farmers are paid off, by 50 cents to $NZ9.50 per kgMS. The 2021-22 midpoint is expected to be $NZ9.30.

Fonterra CEO Miles Hurrell said the lift in the forecast milk price reflects the milk supply and demand picture and the current strong US Dollar.

He specifically pointed out the rises in interest rates and inflation to levels well above Fonterra’s assumptions, “as have commodity prices in response to the continued strong demand for dairy.”

This feeds into the Farmgate Milk Price expectations, which you can see in our updated forecast of the 2022/23 milk returns and an updated earnings guidance range of 30-45 NZ cents share. The previous guidance was 25 to 35 NZ cents a share.

Mr Hurrell said that 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 favourable Ingredients margins.

“The wide earnings range for 2022/23 reflects the current high level of uncertainty that comes with operating in a globally-traded, volatile market.

“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. These near-term headwinds have the potential to impact some of the Co-op’s targets.

“When we released our 2030 long-term aspirations in September 2021, we committed to updating farmers and the market on our progress along the way.

“We’re still on track for our 2030 financial targets, but the last few months have shown that there will be some bumps along the way.

“A series of global events have changed some of the assumptions the Co-op’s aspirations were based on.

Mr Hurrell said the higher input cost “are impacting the cost of our debt in the short term and have also pushed on- farm costs up.”

“This in combination with ongoing regulatory changes, will potentially reduce milk supply volumes.

“As the higher milk prices lift working capital, our overall debt position has the potential to trend higher but still within our current debt parameters.

“What happens beyond next year is considerably less certain, with a wide range of possible outcomes. As a result, the indicative markers for future financial years which are set out in the Co-op’s long-term aspirations will be updated closer to the time,” says Mr Hurrell.

The Co-op will provide earnings guidance for 2023/24 at the end of the 2022/23 financial year and at the corresponding point going forward in future financial years.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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