NZ: Fonterra predicts profit drop

By Katy Askew | 11 December 2013

Fonterra to invest in milk powder production

Fonterra to invest in milk powder production

New Zealand dairy giant Fonterra has forecast a near-50% drop in full year operating profit as its processing capabilities struggle to keep up with surging global demand for milk powder.

The company said it now expects fiscal 2014 EBIT to total NZ$500-600m, down from the NZ$1.02bn booked in fiscal 2013, which ended on 31 July. The group also lowered its dividend to NZ$0.10 a share, down from NZ$0.32 a share.

Fonterra did maintain its record farm-gate milk price, which stands at NZ$8.30 a kilogram of milk solids. However, the group acknowledged that under its established pricing formula it should have raised the payout to $9 a share.

The company said 30% of its milk supply was being diverted into lower-value cheese production because of the limited nature of the cooperative's milk powder processing facilities.

"This season, we have devoted the maximum possible volume of milk to whole milk powder and skim milk powder streams to maximise payments to our farmers. However, we have not been able to lift powder production above the current 70% level as we are limited by the nature of Fonterra's existing production facilities in New Zealand," CEO Theo Spierings said.

The company has therefore been unable to fully capitalise on surging global demand for milk powder products, which has been boosted by growing consumption from China, Africa and the rest of Asia.

Fonterra emphasised it is investing in expanding its milk powder capacity and the board has approved $235m investment to develop a third powder drier at Fonterra's Pahiatua production facility in the lower North Island.

"We need to continue investing in greater flexibility in our manufacturing assets so we can meet changes in global demand and commodity cycles," Spierings said. "The new market realities mean new opportunities - and we must go after them now as we have in the past by driving forward with our volume and value strategy."

Show the press release

Fonterra Co-operative Group Limited is maintaining its forecast Farmgate Milk Price for the 2013/14 season at $8.30 per kgMS.

 

 

Chairman John Wilson said milk powders are continuing to sell at very high prices because of the strong global demand and limited supply.

“Only four months into the season, we are in an extraordinary situation.

“The gap between prices for milk powders compared to cheese and casein is greater than it has ever been before.

“The high powder prices are good for our farmer shareholders, and good for New Zealand.

“The forecast Farmgate Milk Price, which is calculated under the Milk Price Manual, is based on processing and manufacturing milk powders. The calculation is also based on the costs involved in production for an efficient manufacturer of Fonterra’s size and scale.

“However, Fonterra’s actual asset base includes a number of cheese and casein manufacturing plants which means that we are not able to maximise profits from these plants in the current environment.

“In such abnormal circumstances, the Board has the discretion to pay a lower Farmgate Milk Price than that specified under the Manual, if it is in the best interests of the Co-operative.

“Today’s forecast is our best estimate, but given the current volatility it may change over the course of the season. As a result of this volatility, the Board has also lowered the dividend forecast for the 2014 financial year to 10 cents per share,” said Mr Wilson.

CEO Theo Spierings said “Doing nothing, and forecasting a Farmgate Milk Price that is higher than we can afford to pay at this stage in the season, is not an option. 

“We will maintain our financial discipline and not pay the Milk Price out of borrowings – particularly in a year when we are forecasting a record payout for our farmers.”

Fonterra is required to consider its Farmgate Milk Price every quarter as a condition of the Dairy Industry Restructuring Act (DIRA). 

Following the Board’s decisions, today Fonterra is announcing that:

- The Farmgate Milk Price will be maintained at its current level of $8.30 per kgMS; 
- This is 70 cents per kgMS below the theoretical Farmgate Milk Price of $9.00 per kgMS calculated in accordance with the Milk Price Manual;
- The estimated full year dividend will be 10 cents per share - delivering a forecast Cash Payout of $8.40;
- Forecast EBIT (Earnings Before Interest and Tax) for the financial year ending 31 July 2014 is currently estimated at $500-$600 million.
  
The Board has also approved an increase in the Advance Rate schedule of monthly payments to farmer shareholders.  The December payment, paid in January 2014, will be increased by 30 cents to $5.80.

Impact of the global situation on stream returns and the forecast Farmgate Milk Price

Fonterra processes its milk into two main product groups – powders (whole milk powder and skim milk powder) and other products (including cheese, casein, milk protein concentrate, nutritionals, and liquid milk). These product groups are referred to as “streams”.

Mr Spierings said “This season, we have devoted the maximum possible volume of milk to whole milk powder and skim milk powder streams to maximise payments to our farmers. However, we have not been able to lift powder production above the current 70 per cent level as we are limited by the nature of Fonterra’s existing production facilities in New Zealand. 

“That is why the remaining 30 per cent of milk is being converted to cheese and casein which are currently generating lower returns.

“The current strong prices for milk powder are being driven by increasing levels of demand from China, and emerging economies in Asia and North Africa.

“Meanwhile, domestic factors in key markets such as Europe, the United States and Japan mean cheese and casein prices are not keeping pace with powders. These factors include local milk pricing regulations, trends in local demand for cheese, and trade barriers.

“Since Fonterra was formed, we have not invested in any new cheese or casein plants and have been evolving our manufacturing asset base to invest in additional milk powder production facilities. Last weekend we officially opened the world’s largest powder drier at Darfield in Canterbury,” said Mr Spierings.

Mr Wilson said that the Board has approved $235 million for the development of a third powder drier at Pahiatua in the lower North Island.

“We anticipated that the market would likely change and that demand for milk powders would increase – but the demand is increasing at a faster rate than anyone predicted.

“Today’s forecast Farmgate Milk Price ensures the Co-operative can stay on course with its strategy and continue optimising the value of our New Zealand milk,” said Mr Wilson.

Staying on strategy and investing in the future

Volatility has become the new norm, and Fonterra must have the flexibility to respond quickly to shifting global demands for dairy nutrition, said Mr Spierings.

“We need to continue investing in greater flexibility in our manufacturing assets so we can meet changes in global demand and commodity cycles. 

“The new market realities mean new opportunities – and we must go after them now as we have in the past by driving forward with our volume and value strategy.

 “We are already doing this. Along with the approval of the new drier at Pahiatua, work is well underway on our new UHT plant at Waitoa and the new drier at Darfield has already produced more than 50,000 metric tonnes of whole milk powder since it was commissioned at the beginning of the season.

“We have also recently made significant investments to expand our global foodservice capabilities. These include doubling the capacity of our Clandeboye plant to produce individual quick frozen (IQF) grated mozzarella, and expanding our cream cheese plant at Te Rapa. The foodservice category includes full and quick service restaurants, institutions, hotels, airline catering facilities and other commercial kitchens.

 

“Over the next few months we will look at additional measures that will further improve our ability to provide higher volumes of the dairy commodities global customers want – when they want them,” said Mr Spierings.

Original source: Fonterra

Expert analysis

The Future of the Dairy Food Market in New Zealand to 2017

The Future of the Dairy Food Market in New Zealand to 2017 is the result of extensive market research. The report presents detailed analysis on the Dairy Food consumption trends in New Zealand, historic and forecast Dairy Food consumption volumes and values at market and category level, brand share and distribution channel data.

Sectors: Dairy, Financials

Companies: Fonterra

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