Fonterra smashes profit but is worried about a steep fall in global dairy prices

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Fonterra, the world’s second largest milk processor, just posted a 123% rise in half year profit to $NZ409 million despite a 9.3% fall in revenue to $NZ8.83 billion.

The stellar profit was more cost management than better prices.

The cooperative says falling global dairy prices are unsustainable as slower economic growth in China, a major export market for New Zealand’s milk producers, weakens demand and Russia continues its import restrictions.

The strong New Zealand dollar has also had a negative impact on the price farmers get for their milk.

“The low prices have placed a great deal of pressure on incomes, farm budgets, and our farming families,” says Fonterra chairman John Wilson.

“Our priority is to generate more value out of every drop of our farmers’ milk by focusing on the areas within our control. We aim to efficiently convert as much milk as possible into the highest returning products.

“Our management is aware of the need for strong performance to ensure that we get every possible cent back into farmers’ hands during a very tough year.”

The strong profit for half year to the end of January came as the cooperative focused on the efficiency of its ingredients business, building demand for higher-value products and maintaining strict financial discipline.

Value added milk products, such as infant formula, are still in high demand in China as consumer seek out healthy and safe products for their children. The Australian producers benefiting from this boom include Blackmores and Bellamy’s.

Fonterra forecasts that its milk payout for the season ending in May will be $NZ3.90 per kilogram of milk solids, down from its previous forecast of $NZ4.15 and well below the $NZ5.25 at the start of the season.

Ratings agency Moody’s says this fall in price cuts the income of farmers and threatens the asset quality of banks exposed to the dairy sector.

Fonterra says global economic conditions remain challenging and dairy prices are not expected to lift until later this calendar year.

However, long term fundamentals for global dairy are positive with demand expected to increase by 2% to 3% a year due to the growing world population and increasing middle classes in Asia.

Fonterra declared an interim dividend of 20 NZ cents a share, up from 10 NZ cents.

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