Dairy Stocks on the Whip: Fonterra’s NZ Production Dips With Drought

  • May 30, 2020 NZST
  • Team Kalkine
Dairy Stocks on the Whip: Fonterra’s NZ Production Dips With Drought

Summary

  • New Zealand's dairy industry is the biggest export earner and dominates agriculture in the country. It is focused on exporting nearly 95% of its total production.
  • The dairy sector has not been impacted by COVID-19 pandemic so far; however, drought condition in North Island is affecting milk production.
  • Dairy giant Fonterra reported a reduction in milk production due to prolonged drought conditions.
  • Despite, Fonterra’s global dairy import volumes across China climbed 10.1% in March.

The dairy industry is one of the largest industries in New Zealand and leads the country’s agriculture sector. Notably, the dairy industry in New Zealand became the largest merchandise export sector, not only in agriculture sector, but the entire economy. According to the Ministry for Primary Industries (MPI), this sector is the biggest exporter in New Zealand worth almost NZ$19 billion in a year.

MPI has a significant role in making sure that the dairy product exports in New Zealand meet standards of food safety as well as the needs of overseas consumers. MPI helps dairy farmers, farm dairy operator, sharemilker, and farm managers to understand and meet the legal requirements.

The dairy exports, in general, contribute 25-30% of the total exports of New Zealand. The dairy industry of New Zealand is distinctive across the globe as it is focused on distributing nearly 95% of its total production.

So far, COVID-19 has not impacted the milk supply but is likely to disrupt export supply chains during the year. However, drought conditions in the North Island are affecting milk supply in New Zealand, and according to USDA Foreign Agriculture Service, the milk production for 2020 is forecasted at 21.7 million metric tons (MMT), a decline of under 1% compared to 2019.

Let us now discuss one NZX-listed dairy nutrition company- Fonterra Co-operative Group Limited.

About the Company

Auckland, NZ-headquartered dairy nutrition company Fonterra Co-operative Group Limited (NZX:FCG) is engaged in the business of processing fluid milk and cream and other related products. Portfolio of the Company comprises brands like Anlene, Annum, Farm Source, NZMP, and Anchor. Fonterra supplies dairy ingredients to exclusive dairy products to consumers, food companies, as well as food professionals in restaurants and bakeries.      

On 29 May 2020, Fonterra provides a global dairy update. Significant highlights include:

  • Monthly milk production in New Zealand is flat and in Australia continues to improve. In the United States and EU new season production up.
  • New Zealand monthly exports decline and monthly exports from Australia, the US and EU increased.
  • China monthly imports increased; however, in Asia, Latin America and the Middle East and Africa imports declined.

 

Fonterra’s Global Production Country wise

New Zealand- In New Zealand dry conditions continued across most of New Zealand and affected April milk production and milk production was relatively flat, down 0.6% on a litres basis (down 0.8% on a milk solids basis) in April compared to April last year.

Australia- In Australia, Milk production is continuing to increase in the second part of the season especially from Victoria and Tasmania because of more favourable weather conditions and increased by 7.1% in March compared to the same period last year.

Europe- Europe milk production increased by 0.9% in March compared to the same period last year as the EU season gets underway. The most substantial production growth was seen in Spain (up 7.1%), followed by The Netherlands (3.0%) and Poland (1.9%) but decreases were experienced by Italy (2.8%) and the UK (2.4%).

The US- In the US, despite lower foodservice demand milk production increased by 1.5% in April compared to the same period last year.

 

Source: Company's presentation

 

Moreover, Fonterra’s milk collection for the 11 months to 30 April 2020 across New Zealand attained 1,447 million kilograms of milk solids, down 0.5% on the previous corresponding period (pcp). Australia milk collection reduced by 12.9% to 93.2 million kilograms of milk solids for the season to 30 April 2020.

Fonterra’s Global Export decline in New Zealand

The Company disclosed that New Zealand monthly exports declined; however, monthly exports from Australia, the United States and EU increased.  In Australia, it was mainly driven by whey and cheese, up a combined 2,941 metric tons.

Fonterra reports jump in March dairy exports to China

In China, Fonterra’s monthly imports increased due of higher volumes across most products with whey, butter, Skim milk powder (SMP), cheese and Whole Milk Powder (WMP), up a combined 22,373 metric tons.

China dairy import volumes climbed by 10.1%, or 23,958 metric tons, in March as compared to the same period 2019. However, the Company stated that the increase in imports might not be sustained once inventory levels are rebuilt. In China, imports for the twelve months to March were increased by 7.7%, driven by fluid milk products and WMP.

Milk Collection 2019/20 Season

  • Fonterra's New Zealand collection in April was reported to 106.3 million kgMS, that is 2.6% less than the same month last season. Drought conditions remained throughout April as rainfall across northern and eastern regions of both islands was less than 50% of normal levels.
  • Milk collection in North Island in April was nearly 51 million kgMS, fell by 9.9% compared to last April. Impact due to drought conditions is still there across major portions of the North Island.
  • The South Island has had a strong start to autumn with April milk production up by 5.4% to 55.3 million kgMS as compared to last April.
  • Fonterra's Australia collection in April was 7.9 million kgMS, an increase of 0.6% on April last season. In Australia, milk production outlooks are getting better for the remainder of the season and into the fiscal year 2021.

 

Source: Company's presentation

 

Outlook- Fonterra Cuts Farmgate Milk Prices As COVID-19 Hits Demand

Fonterra forecast a farmgate milk price between NZ$5.4 to NZ$6.9 per kilogram of milk solids for the season 2020-21. The estimate is lower than in the current season, which is narrowed to nearly NZ$7.1-NZ$7.3 from NZ$7.00-NZ$7.60 per kgMS for 2019/2020.  

The Company stated that this would see the Fonterra’s contribution of NZ$11 billion to the New Zealand economy through milk price for the year.

However, Chairman John Monaghan said that the COVID-19 pandemic had generated substantial uncertainty in forecasting the future of global dairy prices in the upcoming 15 months.

Fonterra stated that as a New Zealand dairy Co-operative Group it is exporting nearly 95% of products. Most of the markets where the Company provides its products have always been prone to sudden shocks, and this can impact where, when and what the Company sell.

Stock Information: On 29 May 2020, FCG stock closed the day’s trade at NZ$3.640 up by 0.83% compared to the previous close. The Company has a market cap of nearly NZ$5.8 billion.

 


Disclaimer
The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. The above article is NOT a solicitation or recommendation to buy, sell or hold the stock of the company (or companies) under discussion. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site.

 

   
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