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Fonterra, the world’s largest dairy exporter, sounded a note of caution on an “unprecedented” decline in milk collection volumes from its New Zealand farmers this year, as it booked an increase in first-half sales and margins. 

The New Zealand dairy exporter said the co-operative’s earnings face “emerging head-winds” for the remainder of the financial year. Peak milk volumes are down 8% on last year’s levels and overall the season’s production is forecast to drop 7% year-on-year. 

CEO Theo Spierings explained: “Our current milk collection forecast is 1,460 million kilograms of milk solids, down 7% on last season, and this is constraining sales,” he said.

Fonterra said the decline in its milk collection is driven “predominantly” by higher rainfall in areas of the North Island. The company noted that this shift is impacting global prices and availability. 

Despite this headwind, which is expected to have a stronger impact on the remainder of the year, first-quarter sales were higher. 

Fonterra said first-quarter revenue rose to NZD3.8bn (US$2.67bn), up 6% on the comparable period of last year. Sales volumes were 2% higher at 4.9bn litres of liquid milk equivalent. Gross margin was “largely unchanged” at 22%, the cooperative added. 

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“Our operating expenses have reduced by 2% to NZD621m and we continue to keep a close rein on them, in line with the financial discipline shown last year,” Spierings said.

Margins strengthened due to an increased focus on value-added products delivered through Fonterra’s packaged foods and foodservice businesses. 

“The consumer and foodservice business achieved an improved gross margin of 31%, up from 28%. This reflects the increasing strength of our brands in key markets and our focus on chef-led solutions in foodservice,” Spierings said.  

Fonterra maintained its earnings forecast for the full-year of 50-60 cents a share, reflecting the impact a higher milk price is expected to have on margin. The group raised its farmgate milk price to NZD6 per kgms.

Chairman John Wilson said the cooperative has had a strong start to the year. “The unchanged earnings guidance range of 50 to 60 cents took into account the fact that a higher milk price had the potential to influence margins across the business. However, we do expect this volatility to continue which could impact both milk price and earnings guidance. We will keep our farmers and investors updated as we move through the year.”