Fonterra Co-Operative, NZ’s biggest company and the world’s biggest dairy exporter, has warned shareholders not to expect a repeat of the strong end of the latest trading year.
Fonterra reports its 2012-13 results today in NZ and is expected to warn that first half returns will be sharply lower because of the adverse impact higher milk prices are having on some areas of the company’s operations and the ability to further boost earnings in 2014.
That’s despite record conditions in the global dairy market which saw the company yesterday lift its current season payout to an all time high of $NZ8.30. It was the second increase in a month.
The lift will mean the already solid NZ economy, will receive a further injection of cash into it over the next few months.
Economists say around $NZ5 billion more than last year will have been injected by Fonterra into the economy. Yesterday’s increase will add $NZ900 million according to some estimates.
It clearly shows the dairy giant hasn’t been hurt by the botulism scare earlier this year which saw several senior executives depart the company.
Fonterra expects to pay NZ$8.30 a kilo of milk solids to its 10,500 farmer shareholders for the season ending May 31, 2014, up from a prior forecast of NZ$7.80 at the end of August, which was up from the NZ$7.50 a kilo at the end of July.
The record forecast farmgate milk price reflected continuing strong international prices for dairy, particularly whole milk powder driven by robust demand from Asia, especially China, chairman John Wilson said in yesterday’s statement.
NZ newspapers quoted BNZ Economist Doug Steel as saying that the increase will mean around an extra NZ$900 million for farmer shareholders compared with the earlier August forecast, and is the "thick end of NZ$5 billion more than the previous season".
FSF 1Y – Fonterra lifts payout to shareholders, but record prices will hurt in coming months
The dairy industry is the backbone of the NZ economy, contributing around 25% of the country’s export income. NZ accounts for about a third of the global supply of dairy exports, ranging from cheese to baby formula and has ridden the boom in China, which accelerated after the milk contamination scandal of five years ago.
The surge in dairy earnings comes at a time when the NZ economy has already reported 10 consecutive quarters of economic growth as well as a strong increase in manufacturing, construction (thanks to the rebuilding of Christchurch) and consumer confidence.
The higher returns from dairying have offset some of the impact of the drought earlier this year on GDP growth. Statistics NZ reported last Thursday that June quarter GDP rose 0.2%, half the 0.4% growth in the March quarter. Growth in the year to June was 2.7%, but would have been well over 3% but for the impact of the drought which has been finally broken by a huge storm across the country’s North Island overnight.
Statistics NZ said the contribution of agriculture to growth had fallen 10.4% since the peak in the December quarter, thanks to the drought.
The drought cut dairy exports in the first six months of the year, which has in turn contributed to the surge in world prices and higher returns to Fonterra and its shareholders.
But there was a sting in the Fonetrra statement with a warning from CEO Theo Spierings that New Zealand’s biggest company also faces headwinds, especially in the first half of the current financial year when earnings are expected to be "significantly lower" than in the first half of the 2013 year.
He said the higher cost of milk would make it more difficult to drive earnings growth in Fonterra’s consumer and foodservices businesses.
"It is difficult to predict when extreme price volatility on product mix will reverse, but expectations are that the impact is likely to be short-term.
"We also expect to see a negative impact on our product mix returns during the first half of the current year as milk powder prices significantly outpace the relative prices of cheese and casein," he said.
Fonterra shares fell 1.5% to $6.28 in Australia yesterday ahead of the release of the results today.
