Fonterra's Farmgate Milk Price falls, revenue rises

Chairman John Wilson says the lower forecast milk price reflects a prudent approach to ongoing volatility in the global dairy market.

Global dairy company, Fonterra Co-Operative Group (ASX:FSF) has dropped its Farmgate Milk Price by $0.35 to $6.40 per kilogram of milk solids.

Meanwhile, a decline in the NZ dollar since Fonterra's last update of its milk price, which is supportive of exporters, may not flow through fully until the following season, he said.

"What is driving this forecast is that despite demand for dairy remaining strong, particularly in China, other parts of Asia and Latin America, we are seeing strong production out of Europe and continued high levels of European Union intervention stockpiles of skim milk powder".

The impact on Fonterra was being partly offset by a weaker New Zealand dollar, he said.

Fonterra's revised forecast still sits above DairyNZ's latest estimate of breakeven, of $5.20-$5.25/kg, and compares with last year's price of $6.12/kg. The cooperative has reduced its forecast by 1% to 1,525 million kgMS - the same volume as last season.

"Dairy prices have weakened since the last update", ASB Bank senior rural economist Nathan Penny said.

"Short-term price risks are largely evenly balanced, with dry NZ weather on one hand and improving global production on the other", he said.

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Sales volumes were down 20 percent and the gross margin, of 16.7 percent, was also lower.

The lower gross margin was in line with the second half of previous year.

Revenue rose 4 percent over a year ago to NZ$4 billion.

Meanwhile, Fonterra said its first quarter revenue had risen by 4 percent on a year ago, but sales volumes and profit margins have fallen because of the wet spring.

The gross margin from ingredients fell to 8.1 per cent from 12.1 per cent. Spierings said Fonterra is confident of meeting its full-year forecasts following revisions after the recent Danone announcement.

An arbitration tribunal had ordered Fonterra to pay Danone a smaller than expected 105 million euros ($124.05 million) over a contamination scare.

"We are focused on continued tight operational and financial discipline and a key eye on our customers' needs to maximise sales opportunities".

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