NZ dairy giant Fonterra cuts milk price target, as profit margins shrink


Fonterra responsible for 30% of the world's dairy exports with revenue exceeding NZ$20 billion, is New Zealand's largest company.
Fonterra responsible for 30% of the world’s dairy exports with revenue exceeding NZ$20 billion, is New Zealand’s largest company.

New Zealand’s Fonterra Co-operative Group Ltd,, the world’s largest dairy exporter, on Friday cut its earnings guidance and slightly lowered its forecast for the farmgate milk price.

The Co-operative forecast the 2017/18 farmgate price at NZ$6.70 per kilogram of milk solids (kgMS), from NZ$6.75 per kgMS.

It would also hold its full-year dividend at the 10 cents a share already paid in April, down from 40 cents in the previous year.

“Our forecast performance is not where we expected it would be,” said Chairman John Monaghan.

“While the numbers are not finalised, our margins were less than we forecasted right across our global Ingredients and Consumer and Foodservice businesses.”

Fonterra said that higher milk prices had put pressure on earnings from its value-added branded products like yoghurt and cheese, and said its full-year normalized earnings will be at or slightly below its previously announced guidance range of 25 to 30 cents per share.

The firm said it wanted to maintain a strong balance sheet, rather than pay out more now to farmers, so that it was well-positioned for any future tough seasons.

The lower dividend and milk price meant farmers may hold off on making large investments, said Nathan Penny, rural economist at ASB Bank.

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“The season has still been a good one for them, but this has taken the cherry off the top,” said Penny, pointing to the relatively high farm-gate prices.

However, he estimated that Fonterra’s 13,000 farmers would on average each lose around NZ$15,000 to NZ$23,000 ($9,900 to $15,200) in extra expected earnings.

That, combined with the likelihood of a revision of the following year’s milk price down from its current NZ$7.00, could weigh further on already low business confidence, he said.

The result adds to growing headwinds for the New Zealand economy, just a day after the central bank unexpectedly committed to keeping interest rates at record lows through to 2020 and raised concerns about persistently disappointing growth.

In March, Fonterra posted a half-year loss, with a large writedown on its stake in Chinese infant formula producer, Beingmate.

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