Tuesday, 05 March 2019 09:31

Sweet and sour from Fonterra

Written by  Sudesh Kissun
Federated Farmers vice president Andrew Hoggard. Federated Farmers vice president Andrew Hoggard.

Fonterra's milk price review last week was a mixed bag, says Federated Farmers vice president Andrew Hoggard.

Most farmers will be happy with the 30c lift in the milk payout range but worried to see the dividend range dip by 10c.

Hoggard says for most farmers the milk price “is the main thing that matters”.

“The milk price is sweet; no complaints there,” he told Rural News. “But when farmers delve deeper and realise their return on investment is down, there will be some cause for concern.”

Hoggard remains hopeful Fonterra’s portfolio review will help bolster returns from its branded business. The co-op will update farmers on the review when announcing its interim results on March 20.

Fonterra last week lifted its 2018-19 milk forecast price to $6.30-$6.60/kgMS, up from the $6.00-$6.30 range announced in December; forecast earnings were revised down to 15-25 cents per share, from 25-35c/share.

Chairman John Monaghan says the improved milk price forecast reflects the increases in global milk prices over the last quarter.  

“Since our last milk price update in December, global demand has strengthened,” he says.

This is driven mostly by stronger demand from Asia, including Greater China. The European Union’s (EU) intervention stocks of skim milk powder (SMP) have also now been cleared for the season and, as a result, Fonterra expects demand for SMP to be strong. 

The co-op will not pay an interim dividend; any full year dividend can only be paid at the end of the financial year and will depend on the co-op’s full year earnings and balance sheet position.

Monaghan says although the milk price is strong the co-op’s earnings performance is not satisfactory and it needs to deliver farmers and unit holders a respectable return on their investment. 

The board is making progress on a full review of the strategy which includes a review of the dividend policy, he says.

“We are taking a close look at our business with our portfolio review, where we can win in the world, and the products and markets where we have a real competitive advantage. We need a fundamental change in direction if we are to deliver on our full potential. We will provide an update on the strategy and the progress made on the portfolio review at our interim results on March 20.”

Fonterra chief executive Miles Hurrell says the underlying performance of the business is not where it needs to be. 

“The main pressure points on our earnings are the three we highlighted in our Q1 business update: challenges in our Australian ingredients and our foodservice businesses in wider Asia. We are making inroads in addressing them but they will not be solved overnight.

“And since our Q1 business update, we have also felt the impact of difficult trading conditions in Latin America, mainly due to geopolitical situations in some countries. 

“In addition, the increase in the milk price, which is the primary cost input in our non milk-price products, has put pressure on the margins for those products, and they significantly contribute to our earnings.

“We remain committed to financial discipline. We are making good progress on our portfolio review and asset [sales] in order to reduce our debt by $800 million this financial year. We are also on track to meet our targets for capital expenditure and operating expenses,” says Hurrell.

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