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Vol 18 No 20, May 27, 2019
farmersweekly.co.nz
Fonterra revamp splutters along Hugh Stringleman
F
hugh.stringleman@globalhq.co.nz
ONTERRA’S thirdquarter results and announcements are a mixed bag of positives and negatives, including a strong 2020 farmgate milk price opening but another downgrade of the 2019 earnings. Chief executive Miles Hurrell denies the Milk Price Model is unbalanced and creating an inability for the co-operative to be profitable when milk prices are high. “It just highlights the need for the strategy reset and the three quite significant announcements we made today signal the direction and the intent.” The announcements were a strategic review of two dairy farm hubs in China, options for the future ownership of the Dairy Partners Americas distribution joint venture with Nestle in Brazil and the closure of the Dennington, Victoria, plant. Next season will begin on June 1 for farmers with a range of $6.25 to $7.25/kg milksolids and an advance rate schedule based on $6.75. Payments will be only $3.80 in the first three months of the new season, which farmers say is a low starting level. The directors have also revised downwards and effectively
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capped the 2019 outcome to $6.30-$6.40 when some analysts were predicting upside. As a consequence of high milk prices the full-year earnings per share guidance was revised down to 10-15c a share, from 15-25c previously. That is a 37.5% chop in the midrange numbers. In February the directors ruled out an interim dividend and said they will reconsider paying a year-end dividend but the prospect looks increasingly unlikely.
Dennington is not viable in a low-milk pool environment. Miles Hurrell Fonterra The revised forecast earnings before interest and tax for ingredients was $645-$725 million and for consumer and food service $400-$430m, down 15% on the forecasts made in March. Though Fonterra is recovering from its 2018 losses, selling assets and reducing debt and capital and operating spending, the projected profits are lower. Chief financial officer Marc Rivers said two areas of most concern in the third quarter results are the ingredients side of
Fonterra Australia and the Latin American operations. The Australian drought is shrinking the milk pool and Fonterra has to put that milk into the highest-returning products and most efficient assets. Dennington is a 100-year-old powder plant at Warrnambool, Western Victoria, with 98 staff who have been offered redundancy and help finding other jobs or Fonterra placements. “It is not viable in a low-milk pool environment,” Hurrell said. Fonterra’s Chilean business had a tough first half with several categories underperforming, consumer and food service chief operating officer Judith Swales said. China food service had recovered as demand for butter bounced back and consumer and food service in Australia and NZ performed well, especially in Australian spreads. Chairman John Monaghan said Fonterra is forecasting its milk collection for the new season to be 1520m kg, up only 10m from this season and 15m on the 1505m in the 2018 season. The $1 range in the opening forecast is realistic because Fonterra has to look more than one year into the future. “The information we have available is continuing to show us that demand remains strong across key trading partners and this is reflected in Global Dairy Trade prices,” he said.
$3.95
Incl GST
Tough times ahead
DAIRY farmers will be under pressure from the low start to Fonterra’s new season advance rates, Federated Farmers dairy chairman Chris Lewis says. “Cash is king for farmers because of seasonal conditions, demands for debt repayment from the banks and the rising tide of on-farm costs,” he said. The forecast of the fourth $6plus season in a row is welcome but farm working expenses have gone up 50c a kilogram of milksolids over the past couple of years and margins are tight. “Tradesmen are charging up to $100 an hour plus travel time and mileage, rates
and insurances have risen considerably and labour costs are going up.” Lewis also mentioned the wall of potential regulations looming and the risk of increased interest rates because the banks expect the Reserve Bank to introduce tougher requirements. “That is why we need Fonterra to have a strong balance sheet and make higher advance rates – farmers were expecting something closer to $5 than $3.80.”
MORE: FARMER REACTION
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