NZ Dairy Prices: Mark to market - ANZ

Analysts at ANZ note that in New Zealand Fonterra lifted its milk price forecast for 2017/18 (+0.15/kg MS), but marked down its dividend forecast (-$0.10/share) and investment in Beingmate (-$405 million to $244 million; initial investment circa $755 million).

Key Quotes

“The lift in the 2017/18 milk price forecast to $6.55/kg MS with the season near 86% sold was the major bright spot. This will be the fourth-highest result on record and helps underpin farm-gate earnings despite a difficult production year for most farmers.”

“A major talking point will be the $405 million impairment of Fonterra’s Beingmate investment. The total write-down from original investment is now $511 million, which equates to $0.32/share.”

“The upgrade in the 2017/18 milk price to $6.55/kg MS will be welcome. It’s a stronger result than our indicator, which is sitting around $6.40/kg MS with the season nearly 86% sold. The uplift implies stronger margins for product sold outside the GDT platform. It was indicated this has added $0.06/kg MS to the 2017/18 season so far, which implies a full season gain of $0.12/kg MS. Historically when the change to the milk price manual was announced a gain of around $0.04-0.05/kg MS was expected.”

“We maintain our 2018/19 opening milk price forecast of $6.00 to $6.25/kg MS. The recent downward pressure on NZD and milk powder prices holding at the top of recent ranges creates some upside risk, but we suspect international prices could be under a little bit of pressure into May on improved milk flow. The demand side of most dairy markets looks strong, meaning any downside should be fairly limited.”

“At the farm gate cash flow now looks reasonably solid heading into early 2019. The upgrade to the 2017/18 milk price lifts deferred payments (July-October 2018), which flows into 2018/19 budgets. For the average Fonterra supplier who is 100% share backed we have cash flow of $6.72/kg MS in 2017/18. Assuming an opening milk price in May around the low $6.0/kg MS mark, then cash flow for 2018/19 will be at a similar level.”