Milk futures extended their downward run, even as processing giant Fonterra underlined weather setbacks to New Zealand production, while a2 Milk trumpeted “strong demand” in China despite the coronavirus outbreak.
NZX whole milk powder futures for April shed 0.2% to close at $2,800 per tonne, their weakest close in a year, and the lowest price for a nearest-but-one contract in 13 months.
The decline took to 16.4% the slide in the contract since the late-January rise in worries over coronavirus, or Covid-19 in China, the top dairy-importing country.
“The Covid-19 epidemic’s impact continues,” said Tobin Gorey at Commonwealth Bank of Australia, noting too “in the background” reports of some rain in the North Island of New Zealand, the key dairy exporting country, where dryness has depressed production hopes.
CBA-owned ASB bank two weeks ago ditched expectations of flat New Zealand milk output in 2019-20, instead seeing a 0.5% decline.
However, Mr Gorey added while “weather forecasters are expecting a little more rain” for parts of New Zealand, expectations are that precipitation will prove “not enough to resolve” dryness.
Separately on Thursday, Fonterra, which processes the great majority of the country’s milk output, cut by 15m kilogrammes of milk solids, to 1,515m kilogrammes of milk solids, its forecast for its milk collections in 2019-20, citing the setback to output from “weather conditions across several parts of New Zealand”.
“We have recently seen a reduction in milk collections and our farmers are facing ongoing challenging weather,” said Miles Hurrell, the co-operative’s chief executive, speaking as Fonterra stood by a forecast for its milk price this season of NZ$7.00-7.60 per kilogramme of milk solids.
The group also stood by a forecast for earnings of NZ$0.15-0.25 per share, “despite current market conditions as a result of coronavirus”.
‘Demand is strong’
Meanwhile, New Zealand’s a2 Milk said that its own Chinese revenues for January and February had come in “above expectations” despite the coronavirus outbreak.
The group, for which infant formula is a key market, said that “given the essential nature of our products for many Chinese families, demand is strong, particularly through online and reseller channels”.
While A2 did acknowledge the “potential for increased supply chain costs” stemming from the hiccups that Covid-19 is causing to China’s logistics, it said its full-year ebitda margin was “still anticipated to be in the range of 29-30%”.
Shares in a2 - which unveiled first-half earnings up 21% at NZ$184.9m, on revenues up 32% at NZ$806.7m - soared 8.9% to a six-month high of NZ$17.07 at one point.
The stock closed at NZ$16.42, up 4.7% on the day.
However, there is a perception that a2 may not be wholly representative of the sector, given its brand and market positioning, with shares in Synlait Milk, a key supplier to a2, continuing to slide on Thursday, ending down 0.3% at NZ$6.15, their lowest close since September 2017.
The stock has now plunged by 26% since the group two weeks ago – in part on coronavirus worries -ditched ideas of continued, or accelerating, profits growth in the year to the end of July, now seeing earnings at NZ$70m-85m, compared with NZ$82.2m last year.
“While Synlait can confirm there has been no material short-term impact on its financial performance in connection with the coronavirus outbreak, it represents some downside risk going forward,” the group said.
Fonterra also flagged an impact on Chinese dairy demand from the virus, saying that thanks to lockdowns imposed following the outbreak “many restaurants and food outlets are closed, which is having a major impact on the operations of our foodservice customers”.
The co-operative added that “there has been a slowdown in processing of containers at ports and we are managing the flow of our product into China carefully to avoid congestion”.
‘Major regional differences’
Separately on Thursday, Dutch-based FrieslandCampina said that while it foresaw an increase in world dairy demand in 22020, “this is expected to be marked by major regional differences”.
It cited expectations of a “general growth slowdown in advanced, as well as emerging economies”, plus “declining consumer confidence in some countries and regions, and trade tensions resulting from protectionist measures”.
Furthermore, “demographic developments, such as the decline in the birth rate in China, also play a role”.
On output, FrieslandCampina said volumes were expected “to continue to rise in 2020” in the European Union, and indeed globally.
The comments came as the co-operative revealed earnings for 2019 up 37% at E278m.
While sales fell by 2.2% to E11.30bn, profits were helped by lower commodity costs, and a E91m gain on December’s sale of the group’s stake in CSK Food Enrichment.