It’s been a rocky few months for Fonterra, the New Zealand dairy giant and the world’s largest dairy exporter.
For those operating in the dairy sector, the volatility of milk prices means that a few bumps in the road are to be expected.
However, it has been anything but a pleasant journey for Fonterra in recent months.
After the dairy price highs of 2007 and 2008, Fonterra has suffered over the last six months or so as the global economic downturn dampened demand for dairy products and drove down dairy prices.
In March, Fonterra booked a 9.6% rise in half-year revenues to NZ$8bn (US$4.54bn). However, the results looked better at first glance. The lower Kiwi dollar and a change in Fonterra’s financial year (which meant two “high sales months” were included in the first-half figures) masked a disappointing performance.
Stripping out those factors, turnover would have been down 7.6% due to falling international dairy commodity prices.
During the first half of Fonterra’s financial year, the group’s debt gearing rose due in part to the weakness of the New Zealand dollar, which made debt held in foreign currency more expensive when converted to the firm’s domestic currency. Fonterra also endured higher costs as it held on to higher inventories over the season’s peak.
The group managed to maintain its forecast on what it will pay farmers for the season but, on publication of the half-year figures, chairman Henry van der Heyden admitted trading conditions were challenging.
“It’s a tough time for everyone and Fonterra is no exception,” van der Heyden said. “We have taken, and will continue to take, the tough decisions to manage the business prudently in the current climate and get our farmers the highest payout.”
And managing the business prudently has been front of mind for Fonterra, not least after the company was caught up in last year’s melamine contamination scandal in China.
The negative impacts of volatility in global dairy markets have been compounded by the effect the contamination had on Fonterra’s business in China.
The first dairy group linked to the contaminated formula was Chinese company Sanlu, in which Fonterra held a 42% stake. Fonterra’s management denied approving the use of melamine, an industrial chemical, in dairy products that went on sale in the country.
While the New Zealand group was cleared of any wrong-doing, Fonterra cut the value of its stake in Sanlu by 70%, leading to an impairment charge of NZ$139m. The Sanlu business has since been sold to fellow Chinese dairy Beijing Sanyuan Group.
After having its fingers burnt, Fonterra is now focusing on growing its existing business in China, the group told just-food this week.
“Fonterra is currently focused on its existing business in China and has no plans to reinvest in the short term,” a spokesperson said. “However, we remain optimistic about the China dairy industry and open to potential investments there in the longer term. Any such investment would rely on us having sufficient control of the supply chain.”
Fonterra’s reticence is understandable but the New Zealand group needs to be ready to pounce again to team up with local partners in what remains a dairy market of high potential.
The world’s emerging markets are renowned for their high-risk, high-reward stature. Many companies have found it tough to crack markets like china, Brazil and Russia and, earlier this week, Fonterra withdrew from one of the most complex markets on the planet.
Fonterra is to quit its venture in India after deciding too much investment was needed behind the business. The company plans to “pass its stake” to venture partner Britannia Ltd.
Mark Wilson, Fonterra’s managing director in the Middle East, pointed to one of the key problems with operating in India – the fragmentation of many consumer sectors and the need for “significant” investment to build a worthwhile business. “Investing in India’s consumer dairy market is not a core priority for Fonterra at this time,” Wilson said.
And selling ice cream in Australia also looks to no longer be a core priority for Fonterra.
On Wednesday, Fonterra announced another move to streamline its business with agreements with Nestle and Regal Cream Products. Another Fonterra executive, John Doumani, said those deals made “good business sense”.
What has been good business sense is the company’s move to trim costs amid weak dairy commodity prices, rising debts and the prospect of continued weak consumer demand for dairy products as the global economy moves through recession.
After milking soaring dairy commodity prices in 2007/08, the watchword for Fonterra right now is caution.