March 28, 2014

Fonterra to boost milk powder production to meet global demand

After its first half earnings slumped, Fonterra Co-operative, the world's largest dairy exporter, will accelerate investment in milk-powder production to meet global demand.

In the six months to January 31 profit fell 53% even as revenue jumped 21%, because a lack of capacity meant about a quarter of the milk collected had to be made into loss-making products such as cheese, the Auckland-based firm said.

Fonterra said it will spend an additional NZD400 million (US$350 million) to NZD500 million (US$435 million) over the next three to four years to increase milk powder production.

Soaring demand for milk powder from China is boosting New Zealand exports and helping to drive one of the fastest economic expansions among developed nations this year. With milk prices near a record, it costs Fonterra more to make other products with the milk it can't process into powder.

Fonterra opted to accept lower margins to protect market share rather than attempt to recover costs by raising prices, chief executive Theo Spierings said. It earned negative returns on cheese and other products that do not track milk powder prices, he said.

Prime Minister John Key was in China last week to strengthen ties with New Zealand's biggest trading partner, which were threatened by a Fonterra contamination scare last year. The incident was later found to be a false alarm.

Spierings says Fonterra's relationships in China are "very good" and it is on target to produce one billion litres of milk from its own farms there by 2020.

Since its inception in 2001, Fonterra has invested NZD1.8 billion (US$1.6 billion) in extra capacity at its sites.