Too much of a good thing has hurt the half year performance of Fonterra, the world’s biggest dairy co-operative in the six months to the end of January which was unable to convert the strong rise in global prices into higher prices for its milk and other dairy products.
But despite the riches a’plenty with record high milk prices, the NZ dairy giant will pay a steady interim dividend of 5 NZ cents a share even though net profit dipped 7%.
In the end that was a solid first half performance in the face of the impacts of Covid, lockdowns, rising dairy prices and supply chain disruptions around the world.
The company told stock exchanges on both sides of the Tasman that first-half profit fell 7% because it was unable to fully pass on record high milk costs through to the dairy products it manufactures.
The co-operative said while profit slid to $NZ364 million in the six months to the end of January, from $NZ391 million in the year earlier period, revenue rose 9% to $NZ10.8 billion.
Those record international milk prices saw Fonterra lift its farmgate price to its highest level of (a midpoint) $NZ9.60 a kilo of milk solids. That’s the highest since Fonterra was formed back in 2001 and easily tops the previous high of $NZ8.40 a kilo back in the 2013-14 season.
Milk prices have surged to record levels underpinned by tight global supplies and strong demand.
That is good for dairy farmers and for the NZ economy with the record prices forecast to inject a record $NZ14 billion into the NZ economy in 2021-22.
But processing companies like Fonterra find it hard because they can’t pass on those higher costs by lifting prices for the dairy products they produce. That’s a lag effect. When prices are falling, processors are slow to pass on reduction (or they make smaller cuts) to rebuild margins.
“Our earnings have been achieved at a time when our input costs have been significantly higher with the average cost of milk up almost 30 per cent on the same time last year,” Fonterra CEO Miles Hurrell said on Thursday. “This shows we’re performing well even with a high farmgate milk price.”
Last month, Fonterra lifted its farmgate price for dairy farmers for this season for a fourth time to between $NZ9.30 and $NZ9.90 per kilogram of milk solids (hence the midpoint of $NZ9.60 a kilo).
A small drop in NZ milk collections this year has added a bit of extra upward pressure on prices. Fonterra said it still expects its New Zealand milk collection for the year to decline 3.8% to 1480 million kgMS. It collected 3.6% less milk in the first half.
The small fall in New Zealand milk collections in the first half reduced the co-operative’s total production, impacting its overall sales volumes.
“While the milk price is at a record high, pricing in our ingredients business, for both reference and non-reference products, has been supportive of both milk price and earnings and we expect this to continue in the second half,” Hurrell said.
“In the medium term, we expect the supply and demand outlook to go some way towards underpinning a strong milk price next season.”
The co-operative retained its full-year earnings guidance of 25-35 cents per share.
Fonterra maintained its forecast for the NZ farmgate price at the current midpoint for the year to the end of July.
Mr Hurrell also revealed that the company is continuing to make progress on the divestment of our Chilean business and the ownership review of our Australian business.
“Both Soprole (Chile) and Fonterra Australia are performing well and our priority is to maximise the value of both businesses to the Co-op.
“We will take our time to ensure the best outcomes from these processes and remain confident on delivering on our intention to return around $1 billion of capital to our shareholders and unit holders by FY24.
Fonterra’s Australian securities were steady at $A3.21.
