New Zealand’s milk products boom has a dark side – as Fonterra (FSF), the world’s leading exporter, revealed yesterday.
The company revealed a 53% fall in first-half earnings on Wednesday as the farmer-owned co-operative’s margins were hit by the impact of the boom in dairy prices around the world.
Higher costs, too much milk, and a lack of capacity to process higher-yielding products hurt Fonterra’s interim.
The slide in earnings hit returns to shareholders. Fonterra slashed its interim dividend to 5NZc per share from 16c a year ago.
It said yesterday that it now expected a full-year payout of 10c per share, down from 32c per share last time. Ouch, that’s a fall of more than two thirds.
So while the dairy products boom continues to boost Kiwi exports and farm incomes, the Fonterra results tells us the company, its shareholders and the NZ nation have all been short changed a little by the company’s failure to invest in new capacity.
The company, which controls about a third of global dairy exports, said normalised earnings before interest and tax (EBIT) fell to $NZ403 million ($A345 million) for the six months to January 31, compared with NZ$693 million a year ago.
It said net profit after tax fell 53% to $NZ217 million even as revenues jumped a solid 21% to $NZ11.3 billion.
FSF 1Y – Fonterra reveals dark side of dairy boom – shareholders and kiwis miss the cream
It is clear from the results detailed yesterday that Fonterra is struggling to capitalise on record-high world dairy prices.
Dairy prices have been rising due to surging demand for milk powder from China and other emerging countries, where growing middle classes are developing a voracious appetite for infant formula and other products such as cheese and yoghurt.
Fonterra earns its best returns from milk powder (especially in China), but world higher prices have pushed up its raw material costs, while it has struggled to meet demand due to a lack of factory capacity.
A bumper dairy season in New Zealand has resulted in all-time high volumes.
But because Fonterra is obliged to buy at historically high milk prices, it has too much milk and not enough capacity to turn it into powder and other high margin products in demand in Asia.
So what milk it can’t process has been used for low value cheese products and casein, which Fonterra said earned negative returns in the half year.
The company said around 25% of the delivered milk had to be converted to cheese because of the lack of processing capacity to make powder.
Theo Spierings, Fonterra chief executive, blamed higher commodity prices and squeezed margins for his company’s drop in profits.
“We had to strike a balance between passing on rising costs immediately or continuing to build our market presence to secure long-term growth,” he said.
Fonterra is ramping up investment with plans to build a series of new processing plants over the next three to four years at a cost of up to $US500 million.
Compared to shareholders who are facing a slide in returns this year. NZ dairy farmers are rolling in hay.
Fonterra chairman John Wilson confirmed the forecast farmer payout for the year of $NZ8.65 a kilogram of milk solids, up from $NZ5.84 last year.
All this means that Fonterra shareholders and the NZ nation are losers because the company has been left short on production capacity for higher margin export products. But farmers are winning handsomely.
That’s a real opportunity lost there. That’s the dark side of the dairy boom which not too many people mention.
The price of the Fonterra Shareholders fund dipped 3.25% in Australian trading yesterday to close at $A5.65. Yesterday’s close was 22% down on the 52 week high for the fund of $A6.75 and not far away from the low of $A5.10 hit last November.
The fund provides non-dairy farmers with exposure to Fonterra’s operations and profits. The slashed dividend won’t be welcome news.
