Dairy farmers suffering from sub-par milk prices will have some relief in the form of what is expected to be a record profit and dividend from Fonterra next week, boosted by protein and cheese prices.
The co-op reports its annual result on Thursday and market expectations are for a normalisednet profit of around $1.2 billion, with a record-high dividend thrown in.
Forsyth Barr analyst Matt Montgomerie said the co-op had enjoyed a “purple patch” over the year to July 31.
“This year is shaping up to be record for earnings, and dividends, for that matter,” Montgomerie said.
Fonterra’s shareholder farmers have already had the benefit of a 50c per share capital repayment, being the proceeds from the sale of wholly-owned Chilean company Soprole in August.
Going on the latest forecast, Fonterra would have been paying its farmers $8.20/kg of milksolids for the 2022/23 season, which ended on May 31.
Since its July 31 balance date, the co-op’s forecast for the current 2023/24 season has dropped to a mid-point of $6.75/kg after two very poor Global Dairy Trade (GDT) auctions in August, and below break-even for most farmers.
Milk is Fonterra’s biggest input cost, so high farmgate milk prices - driven mostly by whole milk and skim milk powder on the GDT platform - can put downward pressure on its earnings.
Milk prices were firm for most of the financial year, but analysts said prices paid for non-reference products - in this case protein and cheese - have given the company a huge earnings boost.
The bulk of Fonterra farmers’ earnings come from the milk price, but a healthy dividend, along with the 50c capital repayment, will help to partly offset the current weak milk price.
Montgomerie said it looked as though Fonterra would deliver a strong result at a time when milk prices had been quite strong throughout most of the financial year.
“They have been able to deliver a strong result at a time when milk prices have been quite elevated,” he said.
Montgomerie expects Fonterra to report normalised earnings of 77.5 cents a share, equating to a normalised net profit of $1.191b, and almost double last year’s normalised profit of $591 million.
Since its formation in 2001, Fonterra’s earnings record has been variable.
“As always with Fonterra, it’s about trying to get more confidence or comfort with its normalised earnings for the business, given that it’s so volatile, and is going to remain volatile for some time,” Montgomerie said.
Craigs Investment Partners analyst Josh Dale said the biggest component of Fonterra’s likely bumper result would be casein and cheddar, the prices of which have been high in relation to whole milk powder, the main reference product.
“Fonterra’s cost of goods sold is driven by the reference products. If the reference products are priced lower than the non-reference products, that opens up an opportunity that Fonterra can capitalise on,” he said.
“They had such a good year in 2023 – you would not expect such a good year to repeat again.
“They were overly good conditions for Fonterra to capitalise on.
“You would not want to extrapolate that too far,” Dale said.
He said the interesting quirk about Fonterra was that the company’s performance was somewhat independent of the milk price, from which the farmer is paid.
“So you can get fluctuations and they don’t always move in tandem, so they are not correlated.”
Fonterra has already announced that it expected to end 2023 at the top end of the 65c-80c normalised earnings per share guidance range, effectively its fifth earnings upgrade this year, based on favourable ingredient margins.
Fonterra chief executive Miles Hurrell.
The co-op has also signalled that it intended to pay a full-year dividend at the top end of its 40 to 60 per cent payout ratio range, implying 48c of full-year dividends, based on an assumed 80c of normalised earnings per share.
Subtracting the 10c interim dividend already paid, that would imply a 38c final dividend.
This, coupled with the 50c capital return to be paid next week, implies 88c per share is to be distributed to unit and shareholders over the next two months.
Craigs last month raised its 2023 normalised earnings per share forecast for Fonterra from 66c to 80c, and its full-year dividend from 36c to 48c.
Analysts expect to see a sharp decline in earnings for the current 2023/24 financial year, assuming conditions normalise.
But looking ahead, despite the headwinds posed by a sluggish Chinese economy, Montgomerie said the co-op could surprise in its earnings outlook.
Chief executive Miles Hurrell, in an email to farmers early this month, said the co-op would soon embark on a cost-cutting programme, aimed at cutting out $1b of costs over the seven years to 2030.
“While we have delivered good earnings through 2023 and have a strong balance sheet, looking out to 2030, we know achieving our long-term targets depends on rigorous focus on where we allocate your milk and where we invest your cash,” he said.
Meanwhile, farmers are anxiously awaiting the result of the next GDT auction, due on Wednesday, for evidence the market has bottomed.
Some dairy futures market contracts have rallied by 20 per cent since August, but analysts said they doubted whether the rally reflected any change in market fundamentals.
This week’s “pulse” auction, a miniature version of GDT, saw whole milk powder prices rally by 8 per cent to US$2655/tonne from US$2450/tonne.
NZX milk price futures are pointing to a farmgate milk price of $7.35/kg for the current season.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
