Earnings fall as world’s largest dairy exporter cuts payout forecast
The Auckland-based company will pay its 10,500 farmer suppliers NZ$5.30 (€3.34) per kg of milk solids in the current season, down from a previous estimate of NZ$6 (€3.78). It raised its projected range for the 2014-15 dividend to 25c-35c a share from 20c-25c.
Dairy prices have slumped this year as China, Fonterra’s biggest customer, bought less in fortnightly auctions after earlier building up its milk-powder stocks. Rural spending may slow as the payout to farmers slumps by about NZ$5.4bn (€3.4bn) from the 2013-14 season, economists at Westpac Banking said.
“This announcement will put real pressure on some farmers’ cash flows,” Ian Brown, chairman of the Fonterra Shareholders Council, said. The cut “will add to the challenges being faced on-farm”, he said.
The New Zealand dollar fell after Fonterra’s statement, dropping to as low as €0.63, the weakest in 12 months.
Farmer confidence fell to a two-year low in the third quarter, Rabobank said. About 47% of dairy farmers expect the performance of their business to worsen in the next 12 months.
Fonterra has confirmed a record payout for last season of NZ$8.40 (€5.30) per kg of milk solids and a dividend of NZ 10c (€6.3c).
Last season’s milk price “represents an injection of more than NZ$13.3bn into the New Zealand economy for the season,” chairman John Wilson said.
However, “the market is currently influenced by strong milk production globally, the impact of Russia’s ban on the importation of dairy products, and the levels of inventory in China”. he said, adding that there is “further downside risk” to this season’s forecast.
Fonterra’s 2014-15 payout forecast assumes the price of whole milk powder rises to about $3,500 a metric tonne by March, said chief executive Theo Spierings. The price rose 0.6% to $2,692 a tonne at the most recent GlobalDairyTrade auction on September 16.
Fonterra said its raised dividend forecast reflects the lower cost of milk at its plants. “A lower forecast farmgate milk price reduces input costs in our consumer and food-service businesses,” Spierings said. “We do expect to deliver increased returns as a result of a recovery in margins on our products.”
Shares in the Fonterra Shareholders’ Fund, a publicly traded trust that tracks the co-operative’s dividend payout and earnings, rose 3c to NZ$6.32.
Earnings before interest and tax fell 50% to NZ$503m in the year ended July 31, the company said. Net income dropped 76% to NZ$179m even as revenues rose 19% to NZ$22.3bn.
The company faced higher input costs and competition in New Zealand and Australia limited its ability to increase prices, curbing margins, Spierings said. Capacity constraints meant it wasn’t able to process all the milk supplied into powder, forcing it to make less profitable products, he said.
Fonterra, which plans to unveil a new global consumer brand next week, last month announced it will buy a stake in a Chinese infant formula maker as it seeks to tap the nation’s lucrative baby milk market.
The partnership “puts our high-quality dairy ingredients in a strong position to capitalise on the opportunity in China’s rapidly growing infant formula market with a respected local partner”, said Spierings.
