Tuesday, April 23, 2024

Dairy doldrums take some wind from sails

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Financial woes on farm in contrast to stellar annual results.
Head of derivatives for Jarden Mike McIntyre saw more farmers use risk management options when milk prices were high.
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Fonterra’s 2023 annual results are tempered by the sobering financial reality many dairy farmers are facing this season, chief executive Miles Hurrell says.

Hurrell said he had mixed feelings about the result, considering how far Fonterra has come in improving its financial position since it posted a $196 million loss for the 2018 financial year.

This year’s results had the co-operative announcing a profit after tax of $1.6 billion, up 170% for the 2023 financial year, as well as a full year dividend of 50 cents per share, including an interim dividend of 10 cents per share.

The cooperative has done a lot of work on its balance sheet to get to this position, he said.

“But we also can’t lose sight – a midpoint of $6.75 for the season we’re in now, it’s going to be tough on farms.”

Hurrell said a number of key drivers helped Fonterra deliver the result, including favourable margins in the ingredients channel, in particular the cheese and protein portfolios, which he called its “star performers”.

“We also saw improved performance in our foodservice channel due to increased product pricing and higher demand as greater China’s lockdown restrictions started to ease from the start of calendar year 2023.

“Further, across the second half, the operating performance of our consumer channel strengthened due to improved pricing. However, we adjusted the long-term outlook for our Asia Brands and Fonterra Brands New Zealand business, resulting in full year impairments of $101m and $121m respectively.

“Greater China’s reported profit increased $11m to $284m, with the foodservice channel showing improved margins and resilience to market disruption from covid-19. However, this was offset by the consumer channel, which included a proportion of the Asia brand impairment.”

Hurrell said the co-operative’s ability to be flexible and shift product from one market to another assisted it greatly.

“We are seeing that play out this year. We’re seeing cheese and protein values significantly higher than milk powders.” 

Looking ahead to this season, he expected the China market to recover early next year, particularly for its ingredients market.

“We have already seen the last two GDT events show some signs of life and of course the FTA [free trade agreement] window opens up from January 1, 2024.

“Is this a signal that we are starting to see demand emerge a bit earlier than we anticipated? It’s probably a bit early to confirm that just yet, we’ll need to see a bit more momentum.”

Hurrell said Fonterra’s medium- to long-term position on China has not changed. The demand for good nutrition remains and its middle class is continuing to grow.

“While there are some headwinds at a macro level, an economy of 1.4 billion people still growing at significant rates at a world economy perspective, it’s a market we will continue to focus on in the long term.”

Hurrell said while they are seeing the impact on the milk price from a China demand perspective, its functional ingredients, cheese and protein businesses are continuing to grow.

While milk powder has been impacted, the rest of Fonterra’s China business is performing well.

“I’m still very bullish on that market over the medium to long term.”

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