Wednesday, April 24, 2024

Season of two halves

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Fonterra farmers will welcome this month’s boost to their beleaguered cash flows with an extra 54c/kg milksolids (MS) hitting their bank accounts thanks to the cooperative lifting its advance and interim dividend payment. Last month Fonterra added 30c/kg MS to its forecast milk price for the 2012/13 season, taking it to $5.80/kg MS. At the same time it predicted the final farmgate milk price, including dividend, would be $6.12/kg MS. The interim dividend, paid in April, was increased by 4c/share to 16c/share, a third more than last season’s interim payment. The board had elected to pay out the maximum allowable interim dividend under its policy in an effort to return as much to farmers as possible.
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By June the average farmer will have received $100,000 more than originally budgeted based on the early season forecast advance payment schedule with advance rates to lift to $4.75/kg MS in April, $4.95 in May and $5.15 in June. They had been expected to remain at $4.25/kg MS through until June when they were to have lifted to $4.40/kg MS.

The boost to cash flow will help farmers plan for winter and give them more security when reworking budgets that have been battered by the severity of the drought, drastic drop off in milk production and soaring feed costs.

The co-op also announced farmers will be able to offer the economic rights of up to 25% of their wet shareholding in May.

Fonterra chair John Wilson said during the stressful times caused by the climate farmers looked to their cooperative for support.

“Backed by our strong balance sheet and operating cash flows we were able to increase the advance rate paid to farmers for their milk,” he said.

“This is particularly important to our farmers. It means we are getting cash to them faster as they begin to dry off their herds for the winter earlier because of the drought and no longer have milk flowing.”

It has been a season of two halves for the cooperative with strong milk supply growth leading to record volumes in the first half of the season before the drought hit and warnings that the second half performance was likely to be challenged.

Fonterra chief executive Theo Spierings warned ongoing volatility in commodity markets could have a negative impact on product mix profitability and intensified competition in consumer markets coupled with slowing of demand in some Asian consumer markets may impact on performance.

The company had achieved net profit after tax (NPAT) of $459 million for the period to January 31, a 33% increase on the same period last year. Normalised earnings before interest and tax (EBIT) was up 26% to $693m.

Spierings said NZ Milk Products’ strong first half reflected the drive to achieve the two core elements of Fonterra’s business strategy – volume and value.

“NZ Milk Products’ performance was achieved through increased volumes, effective management of our product mix and a focused effort by the sales team to achieve higher price premiums compared to dairy commodity prices,” he said.

The new 15 tonne/hour dryer at Darfield had helped deliver NZ Milk Products’ strong performance and process the record peak milk flows last spring.

Spierings said the co-op’s rapid response to varying price signals across the range of dairy products and ability to alter manufacturing volumes of each meant it was able to take advantage of higher prices for products such as cheese, casein and milk protein concentrate (MPC). This flexibility at an operational level was a significant contributor to NZ Milk Products’ 9% rise in sales volumes to 1.474m t, he said.

High supply volumes of milk products helped keep commodity prices down, around 16% below where they’d been at the same time last season. But Spierings said NZ Milk Products’ focus on performance was reflected in a 65% increase in normalised EBIT to $422m.

However Fonterra is still struggling with its Australian businesses and there are some ominous signs that Asia consumer market demand is slowing. The Australia-New Zealand business normalised earnings fell by 32% to $98m, dragged down in the main by Australia.

Spierings said that while consumer business performance in NZ was slightly better than last year the competitive retail sector in Australia continues to create difficulty.

The ingredients business in Australia had also had to deal with a significant margin squeeze as the competition for milk supply in Australia intensified. This was compounded by an adverse product mix due to lower demand in the export sales of value-added nutritional powders, and more milk being channelled into lower value milk powder sales.

Fonterra will close its Australian Cororooke site as part of a recovery plan that included continuing rationalisation of the brands portfolio in that market and cost reductions following a recent restructure of the business.

In Asia/Africa/Middle East higher volume growth in the foodservice and consumer brands business across China, Indonesia, Malaysia, Middle East and Vietnam contributed to a 13% increase in sales volume which helped underpin a strong first half performance with normalised EBIT up 27% to $100m.

Latin America achieved volume growth of 11% and a normalised EBIT growth of $67m or 5% driven mainly by continuing good performance from the co-op’s Chilean business, Soprole.

But Fonterra’s share of profit from Dairy Partners America (DPA) in South America was down 21% primarily due to operational issues that led to lower volumes and margins in Venezuela.

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