Fonterra (ASX:FSF) share price in focus after boost to forecast milk prices

The Fonterra share price has been a strong performer over the past year. Today the dairy co-operative has raised its forcast milk prices.

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fish eye view of dairy cows in paddock

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The Fonterra Shareholders’ Fund (ASX: FSF) share price will be in focus after the dairy co-operative this morning advised lifting its farmgate milk price range for New Zealand farmers. Despite the positive news, Fonterra shares have remained flat so far in morning trade.

Why has the co-op raised its milk price forecast?

The Fonterra share price has failed to respond to this morning’s announcement advising the co-op has raised its expected farmgate milk price for the 2020-2021 season from NZ$6.70–7.30 (AU$7.05–7.68) per kilogram of milk solids (kgMS) to NZ$6.90–7.50 per kgMS.

The company said the midpoint range, which is what farmers receive, had increased to NZ$7.20 per kgMS.

Explaining the roughly 3% increase in the milk price outlook, Fonterra’s CEO Miles Hurrell pointed to strong demand for dairy. Global Dairy Trade (GDT) prices have continued to increase since Fonterra revised its milk price in early December.

According to Hurrell:

In particular, we’ve seen strong demand from China and South East Asia for whole milk powder (WMP) and skim milk powder (SMP), which are key drivers of the milk price.

This lift in our forecast Farmgate Milk Price is good news for New Zealand farmers. It would see the Co-op contribute almost $11 billion to the New Zealand economy through milk price payments this year, which helps support the wellbeing of rural communities.

New Zealand exports some 95% of its milk production, with Fonterra playing a large role in collecting the milk. That lack of domestic competition for supply means there is no set market price for dairy.

For this reason, Fonterra calculates a farmgate milk price. This enables total returns to be distributed between payments for milk and returns on the share capital invested by shareholders.

With a nod to various uncertainties remaining in the year ahead, Hurrell added:

Now that we’re through the peak of the 2021 milking season, the impact of any changes in global market dynamics is reducing and our view of the season is firming up. However, we are continuing to keep a close eye on a number of factors. These include New Zealand weather conditions, expected challenges from further waves of COVID-19 and increasing milk production in the Northern Hemisphere.

Fonterra is due to announce its half year results on 17 March, when the Co-op will also offer updated full year earnings guidance.

Fonterra share price snapshot

The Fonterra share price has remain unchanged by today’s announcement. This compares to a 1.9% gain on the All Ordinaries Index (ASX: XAO).

Over the past 12 months, however, Fonterra shares are up 10.4%, easily outpacing the All Ords 0.9% gain in that same time.

Based on the current Fonterra share price of $4.25, the co-op pays a 0.9% dividend yield, unfranked.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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