Milk Major Fonterra Eyes Dividend On Q3 Earnings Lift

By Glenn Dyer | More Articles by Glenn Dyer

The giant Kiwi dairy co-operative, Fonterra has posted a bumper third-quarter earnings result but remains cautious about the outlook because of the COVID-19 pandemic.

Despite that caution though, Fonterra says it thinks it will be in a position to pay a dividend to shareholders this year and can get through the coronavirus-induced recession without layoffs.

But Fonterra warned its dairy farmer suppliers that the outlook for dairy pricing in 2020-21 was not looking encouraging because of the impact COVID-19 and lockdowns were having on consumption levels in major markets such as China, Australia, the US and Asia.

Fonterra says global prices are down 17% and the outlook for more weakness as demand softens and prices follow.

The company on Thursday reported earnings before interest and tax (EBIT) of $NZ815 million ($A759 million) for the 9 months to April 30, up more than a third ($NZ301 million) on last year’s similar result.

“The work done over the last year to strengthen our balance sheet, and the Co-op’s ability to respond quickly has helped us manage the COVID-19 situation over the last few months,” CEO Mike Hurrell said in a statement.

Agriculture was labelled essential during New Zealand’s lockdown and was one of the few industries able to keep doors open.

“Covid-19 has affected virtually every country, market, and industry, and as a result, the global dairy market is volatile and the outlook is uncertain. This is a tough environment for everyone.

“As a New Zealand dairy co-op, exporting 95 percent of our products, many of the markets we do business in have always been prone to sudden shocks and this can impact where, when and what we sell.

“However, the global nature of Covid-19 is like nothing we’ve experienced before. Like other businesses, we will feel the impact of Covid-19 and its flow-on effects but how and to what extent is still uncertain. We are drawing on all our experience in managing market volatility,” Hurrell said.

Fonterra said that one of the main drivers of the softening demand is that many foodservice businesses remain closed. On the supply side, the European Union and the United States have just been through the peak of their season and that milk is flowing into export markets and increasing competition for sales. As a result, prices are softening across the board.

Global dairy prices are off 17% since the end of January according to the fortnightly auctions.

“Our businesses continued to operate at 100 percent through COVID on a global basis and the ability for us to collect, process and distribute and sell milk has been a real strength of ours,” Mr. Hurrell said.

“We have no intention of reducing or changing staff numbers,” Mr. Hurrell declared.

Mr Hurrell said the ingredients (up nine percent to $NZ668 million), consumer (up 46 percent to $NZ187 million), and food service (up 54 percent to $NZ208 million) divisions grew their earnings despite COVID-19 hits.

”We saw our sales in China fall in February, but they bounced back to more normal levels in March and this continued in April.”

While this year’s farmgate milk price has been set at $NZ7.10 to $NZ7.30, next year’s price has been indicated at $NZ5.40 to $NZ6.90 per kgMS due to expectations of weak pricing and demand.

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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