Dairy Deals: Fonterra Drops Farmgate Milk Price, Kirin Confirms LDD Sale

By Glenn Dyer | More Articles by Glenn Dyer

Different approaches yesterday to dairy product pricing for farmers from Fonterra, the world’s biggest exporter – up for Australia, but down for New Zealand.

In fact, we saw more bad news for Kiwi dairy farmers who supply Fonterra with the company yesterday lopping its estimated 2019 farmgate price by up to 50 NZ cents Kg of milk solids in the second cut two months thanks to the continuing slide in global prices for dairy products.

Yesterday’s cut from $NZ6.75 per kilogram of milk solids (kgMS) to a range of $NZ6.25-$NZ6.50 follows the August trim of 25 cents (to $NZ6.75).

That will be less than the $NZ6.70 a kilogram paid for 2017-18 ( plus a 10 cents a share dividend to shareholders in the listed trust).
NZ economists said that if the 50 cent cut is applied, Fonerrra supplier farmers could be $NZ78,000 a year worse off – on top of the $NZ39,000 hit from the August cut. That compares with the $NZ7 a litre estimate.

But In Australia, we saw good news and a bit of bad.

The good was Australian farmers getting 13 cents a kilogram of milk solids more from Fonterra said would bring its average price to $A5.98/kgMS.

But in the same statement, Fonterra has trimmed slightly its forecast closing range from $A5.98-$A6.20/kgMS to $A5.98-$A6.10/kgMS.

Fonterra Australia managing director René Dedoncher said the increase would help support farmers facing “challenging conditions” but said market conditions were “putting downward pressure” on the upper end of its season end forecast.

“Rising costs for feed and water due to the drought means that cash flow is even more critical for our farmers,” he said.

“Receiving this increase in their milk payment now, rather than later in the season, will help our farmers make important decisions on input costs and plan for the remainder of the year.

“This milk price is reinforced by our strong Australian business which is performing well and generating repeatable returns, and is supported by tightening domestic supply of milk and the weakening Australian dollar.”

In NZ, Fonterra CEO, Chief Miles Hurrell said the company’s milk supply was growing, and despite a rise in Chinese demand for whole milk powder, there was still a mismatch between supply and demand.

Fonterra lifted its New Zealand milk collection volumes by 1.3 percent to 1,550 million kgMS.

Fonterra Chief Executive, Miles Hurrell, says the change in the forecast Farmgate Milk Price was due to a stronger global milk supply relative to demand at this time.

“I know how hard it is for farmers when the forecast Farmgate Milk Price drops, but it’s important they have the most up to date picture so they can make the best decisions for their farming businesses,” he said in a statement.

“We are still seeing strong production coming from Europe, US, and Argentina. While the hot weather in Europe has slowed down the region’s production growth, it is still tracking ahead of last year. US milk production is up slightly and Argentina’s is up 6.8%.

“Here in New Zealand, the season has got off to a positive start, mainly thanks to good weather and early calving in the South Island. As a result, we have increased our forecast milk collections for the year to 1,550 million kgMS – up from 1,525 million kgMS.

He said that global demand is simply not matching current increases in supply.

“At recent Global Dairy Trade (GDT) events, prices for all products that make up the milk price have fallen. Demand for WMP (whole milk powder), in particular, continues to grow in China, and it remains strong across South East Asia, but it simply isn’t matching current levels of supply.”

Meanwhile, Japanese brewer, Kirin has confirmed that after a month-long review, it wants to sell its Australian dairy and juice maker Lion Dairy and Drinks (LDD).

Lion Group, owned by Japanese beer giant Kirin Holdings, launched a strategic review into its dairy and juice arm last month to look at the value of investing or carving off the business.

In a statement on Tuesday, Lion’s chief executive Stuart Irvine said the sale was the best option to set both Lion and LDD up with the capital and resources needed for future growth.

“It’s clear from the further work done in recent weeks that LDD’s strategy to more fully leverage growing consumer wellness trends will require new capabilities and capital investment,” Mr. Irvine said.

LDD owns, among others, the Pura, Masters and Dairy Farmers milk brands, Berri Juices, Yoplait and Farmers Own yogurts and King Island Dairy cheeses.

Deutsche Bank, King & Wood Mallesons and Greenhill & Co Australia have been appointed to advise the sale.

Mr. Irvine said capital raised will fund growth in Lion’s other businesses including its alcohol and coffee brands.

Lion’s alcohol businesses in Australia and New Zealand will not be affected by the sale of LDD. Last year, Kirin sold its money-losing Brazilian beer business – bought for $US3.9 billion in 2011 – to Heineken for $US1.09 billion.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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