However, the company is confident of delivering on its infant formula and nutritional products strategy, says managing director John Penno.
Challenges associated with Chinese government regulatory reform are hampering the country’s lucrative infant formula trade.
China is determined to restore its reputation for food safety, damaged in 2008 when its dairy industry was almost paralysed by the melamine scandal. Last June China’s State Council issued a formal notice, making it clear all formula manufacturers in the country have to use a quality control system as strict as the one used in drug manufacturing. It also banned repackaging. More importantly, it requires formula manufacturers to set up their own farms to secure milk sources to help consolidate China’s dairy industry, which has at least 120 dairy companies nationwide.
Penno says in the short term these regulatory changes will continue disrupting the Chinese market and Synlait may not achieve its target of 10,000 metric tonnes of infant formula and nutritional sales this financial year.
“However, we remain confident these changes will validate the strategy of our business over time and will underpin our ability to meet our long term targets through expected volume growth from our key customers in this market.”
Meanwhile Synlait continues developing key markets outside China. “We expect to commence production of milk powders as infant formula ingredients for two new tier-one multinational companies in the second half of this financial year,” says Penno.
Synlait Milk also expects to commission its lactoferrin plant late February and start producing commercially in early March. This somewhat lags the planned commissioning date but the company expects to exceed its forecast two tonnes of lactoferrin sales this financial year.
Synlait last month increased its forecast milk price for the 2013-14 season from $8/kgMS to a range of $8.30 to $8.40/kgMS.
It also lifted its advance rates for the season effective from January, to be paid February, from $5/kgMS to $6.40/kgMS. Fonterra is maintaining a forecast price of at $8.30/kgMS despite the theoretical price calculated under the milk price manual of $9/kgMS.
Federated Farmers dairy chairman Willy Leferink expects all processors to offer competitive farmgate prices.
“For farmers, this level of farmgate competition is positive with other processors getting closer to joining the market. Importantly, we are getting advance rates that will help cashflow following the train wreck drought hit season that was 2012-13.”
Synlait Milk chairman Graeme Milne says it is the company’s policy to pay its contract milk suppliers a competitive market price and the increase reflects the sustained high commodity prices.
“Our forecast FY2014 financial performance continues to improve and we expect the company will benefit from both earnings growth in our value added categories and a favourable product mix for the remainder of this financial year.”
Assuming current market conditions prevail, Synlait expects its 2013-14 net profit after tax will be well ahead of the prospectus forecast of $19.8 million, and is forecast to be $30 m to $35 m.
