New Zealand dairy giant Fonterra today (25 September) reported a fall in annual operating profit thanks to a drought that hit milk prices and the reorganisation of its business in Australia.

Announcing its full-year results this morning, Fonterra revealed normalised EBIT fell 3% to NZ$1bn (US$823.3m) for the 12 months to 31 July. Operating profit was negatively impacted by the revamp of Fonterra’s Australian business and a drought that hit New Zealand in the second half, causing “extreme volatility” in milk prices.

Revenue was down 6% to $18.6bn, as the drought meant New Zealand milk production fell 9% in the last six months of the fiscal year. In order to support its farmer-shareholders during this period, the dairy co-operative used its strong balance sheet and cash flow to raise the advance rate paid to farmers for their milk. However, this resulted in a 28% drop in operating cash flow compared to last year.

Fonterra was dealt a further blow when it recalled a batch of concentrated whey powder over concerns that it was contaminated with a bacteria that can cause botulism. The recall turned out to be a false alarm, but the scare dented the group’s reputation in key export markets – notably China.

The recall was initiated on the last day of Fonterra’s financial year – meaning that its financial fallout will be seen in the current quarter. Fonterra CEO Theo Spierings said that the company has stepped up its investment in China in order to rebuild trust. “Additional resources have… been deployed to ensure we manage change and rebuild our reputation, while at the same time we continue to run the business efficiently.”

Fonterra’s net profit rose 18% to $736m, boosted by lower financing costs – which were down $41m – and a tax credit of $68m.

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Click here for coverage of Fonterra’s media briefing to discuss its annual results.