March 23, 2011

 

Fonterra on track for one of its best years ever

 

Strong international dairy markets mean that 2010-11 is shaping up to be one of Fonterra's best years ever in terms of returns to its farmer shareholders, the company said.

 

Announcing the Co-operative's financial results for the half-year to 31 January 2011, Fonterra confirmed its current forecast Payout range for the 2010-11 season of NZD7.90-NZD8.00 (US$5.86-US$5.93), before retentions, and NZD7.75-NZD7.80 (US$5.75-US$5.78). This is unchanged from the 60 cents increase in the Payout range announced in late February 2011.

 

This forecast range means this year's Payout may surpass Fonterra's previous record in 2007-08 of NZD7.90 (US$5.86), before retentions, and $7.66 (US$5.68).

 

The 2010-11 forecast Payout range (before retentions) is based on a forecasted Milk Price of NZD7.50 (US$5.56) per kgMS and a Distributable Profit range of NZD550-NZD690 million (US$407-US$511 million), equating to 40-50 cents per share. Fonterra is currently targeting to pay a dividend of 25-30 cents per share out of Distributable Profit.

 

Fonterra's net profit after tax for the six months to 31 January 2011 was NZD293 million (US$217 million). This is the first time Fonterra has reported a profit for the half-year. As a consequence, there is no prior half-year comparison.

 

Fonterra Chairman, Sir Henry van der Heyden, said the forecast Payout would be welcomed by farmers, many of whom have businesses that remain under pressure after several challenging years and a current season marked by some difficult weather conditions. "It is also good news for the New Zealand economy in the post-earthquake environment, underlining the importance of dairying to New Zealand's economic wellbeing."

 

Sir Henry said the current levels of dairy prices appear to reflect a change in supply and demand for food internationally.

 

"We are benefitting from a combination of demand growth from China and other Asian markets, and tighter international supply due to adverse weather conditions in many parts of the world. To date, these higher prices have more than offset the negative effects of a stronger New Zealand dollar against the US dollar, in which most international dairy sales are denominated."

 

However, with global prices for many "hard" and "soft" commodities, including dairy, approaching all-time highs, Sir Henry sounded a note of caution. "We must be mindful of the impact that dairy prices can have on demand in some markets, as well as on supply growth around the world. As prices continue to climb, the possibility of a downward correction can increase and farmers should always need to be prepared for a potential global price drop."

 

Fonterra CEO, Andrew Ferrier, said the rising Milk Price is putting some pressure on Fonterra's operating earnings, which are primarily driven by the ability to make and sell a range of dairy products at a margin above the cost of milk collected from farmers.

 

"This margin squeeze is particularly significant in our ingredients businesses where the cost of raw milk represents a substantial proportion of total operating costs. Thanks to our strategy of building leading brand positions in key categories, our consumer businesses are better placed to withstand price increases - but they are not immune."

 

The tragic events of February and March in Christchurch and Japan, respectively, will be reflected in the second half of the financial year. At this stage Fonterra is in the process of quantifying the impacts on its business, which will be primarily in the area of inventory losses. To some extent Fonterra expects that these losses will be covered by insurance.