March 23, 2016


Fonterra records 123% profit jump as economic situation remains challenging


Fonterra has recorded NZD409 million (US$276 million) in half year profits, a huge 123% jump despite revenue declining by 9.3% to NZD8.83 billion (US$6 billion).


The positive performance reflects more on cost management than better prices.


The drop in the world's dairy prices is unsustainable, the cooperative said, with slower economic growth in China, a key market for New Zealand's milk producers, and Russia's import restrictions.


Milk prices in New Zealand are also adversely impacted by the country's strong currency.


"The low prices have placed a great deal of pressure on incomes, farm budgets, and our farming families," Fonterra's chairman, John Wilson, commented. Fonterra's priority in the meantime is to "generate more value" out of local milk production by focusing on areas within the cooperative's control, he added. "We aim to efficiently convert as much milk as possible into the highest returning products."


Currently, Fonterra is working on the efficiency of its ingredients business, bolstering demand for higher-value products while ensuring tighter financial control. It also expects its milk payout for the season concluding in May to be NZD3.90/kg (US$2.63) of milk solids, a drop from a previous forecast of NZD4.15 (US$2.80) and NZD5.25 (US$3.54) at the start of the season.


The reduced amount would affect farmers' income as well as the asset quality of banks tied to the dairy industry. Moreover, dairy prices, in the midst of the present economic situation, will not rise until the later part of 2016, Fonterra said.


Still, long term fundamentals for world dairy are positive with demand expected to increase by 2% to 3% yearly as the global population grows and the middle classes expand in Asia.


- Business Insider Australia

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