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Fonterra (ASX:FSF) share price on watch after narrowing earnings guidance

flat dairy asx share price represented by sad looking black cow
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The Fonterra Shareholders’ Fund (ASX: FSF) will be one to watch today as New Zealand dairy company narrowed its forecasted earnings guidance.

The fund declared it would raise the bottom range of its previously forecast earnings per share – from 20–35 cents per share up to 25–35 cents per share.

Words from the CEO

Fonterra CEO Miles Hurrell stated the move would provide more clarity on its full-year earnings guidance. The fund’s interim accounts are due for release on 17 March.

“That is why we have come out today with a narrower forecast earnings range of 25-35 cents per share, which still reflects the usual uncertainties we face over the course of any given year.”

Hurrell added: “Despite the challenges and flow on effects of COVID-19, the team have remained committed and disciplined. There has been strong demand for the Co-op’s New Zealand milk, and we’ve continued to get product to the market.”

Fonterra’s unique market situation

Fonterra was created out of the deregulation of the New Zealand dairy industry. The liberalisation process started when the New Zealand government stopped setting the price of dairy products in 1976. It concluded when dairy companies were allowed to set their own prices in 1993.

The fund is not just the largest dairy producer in all of New Zealand, by far, but the largest company in the Kiwi nation. It is a co-op owned by 11,000 dairy farmers.

30% of the entire world’s dairy exports are produced by Fonterra. Brands familiar to Australians include Western Star, Mainland, and Perfect Italiano.

Because of the Co-op’s extreme market power, it sets the price for dairy. With oversight from the New Zealand Commerce Commission, Fonterra declares the price it will pay dairy farmers for their products. Their last announcement lifted the farmgate price to NZ$6.70-7.30 per kilogram of milk solids.

The farmgate price is calculated by recording global prices for dairy commodities, such as skim milk powder and buttermilk powder, then deducting the costs of productions. The end result is price paid to farmers that is the highest possible, but which still leaves the dairy behemoth with adequate returns.

Fonterra uses export prices in this calculation as it sells 95% of its product overseas.

Many believe the high price New Zealanders pay for dairy products is a result of this system.

Fonterra’s share price outlook

While flat yesterday (opening and closing at $4.63), the Fonterra share price has been on an upward trajectory for the last year.

One year ago, Fonterra shares were selling at $3.74 – an incredible 24% rise compared to the All Ordinaries (ASX: XAO), which gained just 1.3% over the same period.

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Motley Fool contributor Marc Sidarous 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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