Fonterra adopts cautious outlook for new season amid market volatility

NEW ZEALAND – Fonterra Co-operative Group Ltd, New Zealand’s dairy giant, has adopted a careful approach as it heads into the new season despite reporting solid increases in milk sales and after-tax profits. 

CEO Miles Hurrell highlighted a “finely balanced” dynamic supply and demand and ongoing challenges, particularly regarding China’s import volumes, which have yet to rebound to pre-pandemic levels.

In its recent financial update, Fonterra posted a continuing operations profit of US$618 million for the third quarter, marking a modest 2% rise from the previous year. 

However, the overall reported profit, including gains from divesting its Chilean business Soprole, dropped by 27% to US$593 million. 

The co-op’s food service and consumer segments showed positive trends with year-on-year volume increases of 7% and 4%, respectively, though its ingredients division saw a decline.

Earnings before tax from continuing operations were US$878 million, down 6%. Despite these fluctuations, Fonterra has updated its FY24 earnings guidance to 60-70 cents per share, reflecting cautious optimism. 

Looking ahead, Fonterra has set the forecast farmgate milk price for the next season at US$4.42-US$5.34 per kgMS, with a midpoint of US$4.88 per kgMS. This forecast has been refined for the current season to US$4.70-US$4.82 per kgMS, with a midpoint of US$4.76.

Hurrell noted that global dairy trade prices have risen over the past two months, reaching levels last observed at the start of the year. However, he cautioned about the potential for continued volatility in global markets. 

“Entering the 2024/25 season, we face a delicate balance in milk supply and demand. China’s import volumes remain below historic norms,” he stated. 

“Given these uncertainties and the volatility risks in global markets, we are approaching the new season cautiously.”

Despite the caution, Fonterra’s business performance has been buoyed by increased volumes in its food service and consumer channels, contributing to a 1% rise in overall sales compared to 2023.

The CEO noted that Foodservice and Consumer volumes are up 4% and 7% yearly, respectively, maintaining steady gross margins.

Fonterra’s earnings before interest and taxes (EBIT) of US$878 million for the period reflected strong performance in these areas. However, the ingredients sector declined following record highs in the previous fiscal year. 

The company is also anticipating softer earnings in the fourth quarter due to seasonal factors and higher input costs in the Foodservice and Consumer channels.

Furthermore, investments in modernizing IT systems have increased operational expenses, a cost that Hurrell noted was traditionally capitalized but is now impacting the balance sheet more directly. 

As Fonterra progresses with its new strategic direction, particularly the divestment of its global consumer and integrated divisions, Hurrell assured stakeholders of ongoing updates.

“We are receiving substantial interest in our consumer and associated businesses,” he said. “While it’s early in this process, we remain committed to keeping our farmer shareholders, unit holders, and the market informed as we move forward.”

Subscribe to our food and agriculture industry email newsletters that provide busy executives like you with the latest news insights and trends from Africa and the World. SUBSCRIBE HERE