Economic - Markets
Fonterra slashes farmgate milk prices as COVID-19 erodes demand
Reuters reports that Fonterra, the world’s largest dairy exporter, cut the price it pays farmers for milk for the upcoming season as demand evaporates due to COVID-19-related restrictions.
"COVID-19 has affected virtually every country, market and industry, and as a result, the global dairy market is volatile and the outlook is uncertain," Chief Executive Officer Miles Hurrell said in a statement.
But the third-quarter update on Thursday 21 May left investors, many of whom are farmers, pleased with shares up 1.7 percent to NZ$3.65, outpacing the broader market.
The Auckland-based company forecast a farmgate milk price between NZ$5.4 to NZ$6.9 per kilogram of milk solids (kgMS) for the 2020-21 season, lower than in the current season, which it revised to NZ$7.1-NZ$7.3, from NZ$7-NZ$7.60.
"In the bigger scheme of things, we're looking at one of the biggest downturns in the global economy in the last century. If in that, farmers come out with a pay of $6 a kilo, they will probably be feeling quite pleased with it," said Michael Gordon, a New Zealand-based senior economist at Westpac.
Though much of the world is still feeling the impact of lockdowns, the food service sector in China appears to be rebounding quickly. This sector is Fonterra’s top market and has bolstered sales to normal levels in March and April, the company said.
Fonterra, which has been re-focusing on New Zealand after an unsuccessful global expansion, reported a near 59 percent jump in nine-month underlying operating profit to NZ$815 million ($500.8 million) due to agreed upon contracts in the current season.
Hurrell told a conference call later that Fonterra does not plan to lay off staff for the moment.
It maintained its full-year underlying earnings forecast of between 15 and 25 New Zealand cents per share.
