Fonterra (ASX:FSF), the world's largest producer and exporter of dairy products, has increased its earnings forecast and expected payments to New Zealand farmer customers in response to rising global prices.
Fonterra reported an 85% increase in profit after tax compared to the previous year, reaching NZ$392 million, and a 63% rise in earnings before interest and tax (EBIT) to NZ$575 million.
The company announced that the forecast Farmgate Milk Price midpoint for the 2023/24 season has risen by 25 NZ cents to NZ$7.50 per kg milk solids (kgMS). The forecast range for 2023-24 has also narrowed to $US7.00-$US8.00 per kgMS from NZ$6.50 to NZ$8 per kgMS.
Fonterra CEO Miles Hurrell attributed the revised forecast to increased demand for reference commodity products in key importing regions, particularly China, during the first quarter. Hurrell mentioned that higher Global Dairy Trade prices and well-contracted sales support their confidence in raising the forecast Farmgate Milk Price.
However, Hurrell cautioned that it is still early in the year, with the potential for further volatility in commodity prices, and the company will closely monitor market dynamics and provide updates as needed.
The strong earnings growth for the first quarter was attributed to improved performance in all three of Fonterra's sales channels. These earnings exclude the performance and impact of selling DPA Brazil.
Hurrell noted that higher margins in the Co-op's Ingredients, Foodservice, and Consumer channels contributed to the earnings boost, with the gross margin increasing from 15.5% to 21.4% compared to the previous year. He also mentioned that the Co-op allocated more milk to the higher-returning Foodservice and Consumer channels.
Looking ahead, Fonterra expects these higher margins to persist in the first half of the year but anticipates a tightening of margins across all three sales channels in the second half due to higher input costs and narrowing price gaps between reference and non-reference products. As a result, the company has increased its forecast earnings guidance to 50-65 cents per share and is on track for a strong interim dividend.
