Fonterra Increases Farmgate Milk Prices as Demand from China Rises

  • Jul 20, 2020 NZST
  • Team Kalkine
Fonterra Increases Farmgate Milk Prices as Demand from China Rises

Summary

  • The dairy industry in New Zealand is the biggest export earner and exports nearly 95% of its total production. China is the biggest importer of dairy products from the country.
  • Fonterra lifted farmgate milk price forecast range for the forthcoming season as demand went up in China.
  • Fonterra increased the lower end the range of farmgate milk price and narrowed it to NZ$5.90 to NZ$6.9 per kilogram of milk solids for the season 2020/21. For the current season, it tightened the range to NZ$7.10 - NZ$7.20 per kgMS.

In New Zealand, the dairy industry is one of the biggest and leads the agriculture sector in the country. Remarkably, the country’s dairy industry is not only the largest retail exporter in the agriculture sector but in the entire NZ economy.

According to the MPI (Ministry for Primary Industries), the dairy industry is the biggest exporter in New Zealand worth almost NZ$19 billion a year. MPI has a significant role in dairy product exports in New Zealand. The association guarantees that dairy products meet standards of food safety and the needs of overseas consumers. MPI helps dairy farmers, farm dairy operator, and farm managers to know and fulfil the legal requirements.

The dairy industry of New Zealand is the largest exporter earner and majorly exports its milk products to China. Generally, dairy exports contribute 25-30% of the total exports of New Zealand. The dairy industry of New Zealand is unique across the world as it distributes approximately 95% of its total production.

ALSO READ: A Look at NZ Dairy Sector and Key Stocks

Due to the COVID-19 pandemic, New Zealand witnessed a slight decrease in the export of its dairy products. However, with improved market conditions in China, dairy companies in New Zealand are anticipating a rise in the export of milk products.  

With this backdrop, let us now discuss an NZX-listed dairy nutrition company, Fonterra Co-operative Group Limited that has lifted the lower end of its farmgate milk price forecast range.

Fonterra Co-operative Group Limited (NZX:FCG) 

Auckland-headquartered dairy nutrition company Fonterra Co-operative Group Limited is engaged in the processing of cream, fluid milk and other related products. Fonterra’s portfolio comprises brands such as Anlene, Farm Source, Anchor, Annum, and NZMP. The Company provides dairy ingredients and dairy products to food companies and customers and offers hot-of-home food services.

Fonterra global dairy trade results at last trading event 16 June 2020-

Fonterra Revises its Farmgate Milk Price ranges

On 17 July 2020, New Zealand-based dairy giant Fonterra disclosed that it had raised the lower end of its farmgate milk price forecast range for the forthcoming season as the demand went up in its top export market- China. Fonterra has revised estimate Farmgate milk price ranges for both 2019/20 and 2020/21 seasons.

On 21 May 2020, the Company had provided its global dairy update and forecast a farmgate milk price between NZ$5.4 to NZ$6.9 per kilogram of milk solids for the season 2020/2021, a broad range due to ongoing uncertainty in the market. For the current season, the Company had narrowed the forecast to NZ$7.10-NZ$7.30 from NZ$7.00-NZ$7.60 per kilogram of milk solids (kgMS) earlier.

Now, Fonterra has further narrowed the range to NZ$5.90 to NZ$6.90 per kilogram of milk solids for the season 2020/21. The mid-point has been raised from NZ$6.15 per kgMS to NZ$6.40 per kgMS.

The narrowing of the milk price for the session 2019/20 toward the lower end of the previous range is the consequence of an improving New Zealand dollar vs the US dollar over the last two months.

Fonterra narrowed the price range for the season 2019/2020 to NZ$7.10 to NZ$7.20 per kilogram of milk solids from NZ$7.10 to NZ$7.30. The mid-point has decreased from NZ$7.20 to NZ$7.15 per kilogram of milk solids.

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Moreover, the co-operative will disclose the final Farmgate Milk Price for season 2019/20 as part of its annual outcomes in September.

Mr Monaghan, Chairman of Fonterra, on the 2020/21 forecast Farmgate Milk Price range, stated that the increase in the lower end of the range was primarily driven by enhanced market conditions in China. He also added-

However, the second wave of COVID-19 infections could hit demand. The first wave of COVID-19 and subsequent global lockdowns forced the dairy exporter to reduce the price it paid farmers for dairy in May.

Fonterra also stated that the support measures for farmers from the governments of European Union and the United States have helped to increase milk production and dairy commodity prices despite the disruption the Company have experienced from COVID-19 to date.

Although there is still a high degree of insecurity in the global markets of Fonterra, the Company foresees a decreasing level of risk, and this strengthens the decision to boost the bottom end of the price range.

Additionally, Fonterra disclosed that it is still early in the new season and the Company is keeping a close eye on the demand of consumer along with the production from the critical milk-producing areas. Milk supply from the European Union, the US and Latin America are growing despite the impact of COVID-19 pandemic, and it is uncertain at this point that how the global recession and the second wave of coronavirus infection around the world could impact the demand.

Stock Information:

On 20 July 2020, FCG stock was trading at NZ$3.890 (at 3:43 PM NZST), up 0.26% from its previous close. The market capitalisation of the Company stood at NZ$6.27 billion.

 


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