Eroding share of milk worries Fonterra shareholders
Fonterra shareholders are concerned with a further decline in the co-op’s share of milk collected in New Zealand.
For the six months ending January 31, the co-operative's reported profit after tax rose 50% to $546 million.
This is despite a challenging global operating environment with market volatility, inflationary pressures and higher interest rates.
Like its farmer shareholders, Fonterra is also facing a sharp rise in operating costs. Total operating costs rose 30% over last year to $1.3 billion.
Chief executive Miles Hurrell says while it was hard to put a number on inflation, it was felt across the supply chain. He gave an example of fuel costs for the co-op. Rolling contracts meant the co-op was signing contracts with higher prices.
"Inflationary pressure have been felt across the business in the majority of the operating expense categories," he says.
Operating expenses weren't helped either by consumer brand impairments, with write-downs totalling $162 million: $92 million in Fonterra Brands New Zealand consumer business and $70m in Asia brands Annum, Anlene and Chesdale.
Chief financial officer Neil Beaumont says a weaker currency and a declining economic environment in some Southeast Asian markets forced the write-down.
In NZ, Fonterra Brands is also struggling with higher costs and a depressed consumer market.
Hurrell says the solid result reflected favourable margins in its Ingredients channel driven mainly by demand for protein and cheese products across multiple markets at a time of constrained supply.
"Our Foodservice channel earnings have also improved as our in-market product prices adjust to reflect the higher cost of milk.
"However, our Consumer channel earnings are down due to challenging market conditions and recognising impairments of our New Zealand consumer business and our Asia brands."
He says the global operating environment remains challenging with heightened market volatility, inflationary pressures, higher interest rates, as well as weather events impacting the global supply chain.
But Fonterra's cash free cashflow for the first six months is more favourable relative to the same time last year, reflecting increased earnings and the sell down of additional inventory held at the end of the 2022 financial year.
"Our increased earnings combined with the strength of our balance sheet has enabled us to pay an interim dividend of 10 cents per share," says Hurrell.
Fonterra retained a forecast farmgate milk price range of $8.20-$8.80/kgMS.
Hurrell says the co-op will continue to watch changes in the market closely.
"The outlook for dairy remains positive with high demand for New Zealand's quality, sustainable dairy nutrition, and global milk supply likely to continue to be constrained."
Fonterra wil release its opening forecast for the next season in May.
"There are a number of risks we continue to watch, including the impact of recent weather events in New Zealand on supply chain and milk production.
"Our co-op's scale, diversity and strong balance sheet positions us well to manage these challenges and we will continue to prioritise higher value products and channels to deliver sustainable returns for farmer owners and unit holders."
