Sour Times for Fonterra as Milk Dries Up

New Zealand dairy giant Fonterra is still assessing whether to sell off its Australian businesses after reporting weaker revenue and earnings as milk collections fell in the 9 months to the end of March.

For the nine months ending to April 30, Fonterra’s reported a fall in sales volumes as a result of “lower milk collections and the timing of sales due to short-term impacts on demand including the lockdowns in China, the economic crisis in Sri Lanka and the Russia-Ukraine conflict.”

Total Group normalised earnings before interest and tax was $NZ825 million, down $NZ134 million “reflecting lower sales volumes, continued pressure on margins from the significantly higher milk price, on-going COVID-19 disruptions, and the rapid decline of the Sri Lankan Rupee.”

Fonterra said its after profit tax for the 9 months fell $NZ115 million to $NZ472 million.

CEO Miles Hurrell said despite significant market disruption, the Co-op continued to deliver a strong milk price and solid earnings.

“As an exporter, many of the markets we operate in have been prone to sudden shocks, which can impact what we sell, where we sell it and when, but right now we’re feeling the impact of multiple events across multiple markets.

“We are actively managing the challenges arising from COVID-19 and other geopolitical and macroeconomic events. However, increasing market volatility and uncertainty, on-going supply chain disruptions and growing inflationary pressures have added increased complexity.

On Australia, Fonterra said it was still assessing the businesses against the company’s longer-term ambitions in NZ and in other markets. The sale of the Chilean operations is proceeding.

“We are continuing our ownership review of our Australian business and the divestment process for our Chilean business, Soprole, is underway. We’re taking our time to ensure the best outcomes for both businesses and remain confident on delivering on our intention to return around $1 billion of capital to our shareholders and unit holders by FY24.

“While our Australian business and Ingredients channel continued to perform well, this was more than offset by the unprecedented economic challenges in Sri Lanka, margin pressure from the higher milk price and other COVID-19 related challenges.

“While historically a good business for us, the significant deterioration of economic conditions in Sri Lanka has seen the rapid devaluation of the Sri Lankan Rupee against the US dollar,” Mr Hurrell said.

Fonterra also revealed its first price estimate for the 2022-23 season – $NZ9 a kilogram of milk solids (kgMS) which would be a record first price for a season and only 30 cents lower than the midpoint for the final estimate for the 201-22 season.

The opening forecast range for Farmgate Milk Price for the 2022-23 season was set at $NZ8.25 – $NZ9.75 a kgMS, with a midpoint of $NZ9.00 a kg.

For the 2021/22 season, Fonterra has maintained its 2021/22 forecast Farmgate Milk Price of $NZ9.10 – $NZ9.50 a kgMS.

“At a midpoint of $9.30 per kgMS, this would be the highest forecast milk price in the Co-op’s history and would see us contribute almost $NZ14 billion into the New Zealand economy through milk price payments,” CEO miles Hurrell said in Thursday’s trading update to stock exchanges on both sides of the Tasman.

That surge of income into the NZ economy is something the Reserve Bank of NZ can’t do anything about but will worry that all that cash will add to demand and inflationary pressures just as the central bank is trying to restrain demand by pushing up interest rates, as it did with this week’s 0.50% rise to 2% for the official cash rate.

Shares in the Fonterra Shareholders Fund rose 0.7% to $A2.59 on the ASX on Thursday.

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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