Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
"I can assure you that your business is incredibly focused on the challenges that you as farmers have in your own businesses right now. We are doing everything we possibly can to get some money out of the business both in working capital... and certainly in sustainable earnings," he said.
Gross margins have significantly improved, so has profitability above base prices, and capital spending has significantly reduced.
The consumer and food service business is generating good returns.
In Asia the improvement in this business has been 33% of gross margin, 4% volume growth; Latin America 35% increase in gross margin, 1% volume growth; and an increasing growth margin in Oceania. In China the volume in consumer and food service is still increasing – a 19% volume increase.
It was off a low base but they were getting significant growth and a good growth margin at about 27%, Wilson said,
Most farms in New Zealand will earn between 50c to $1 under their cost base. Fonterra was able to do something to assist, he said, referring to the Fonterra cooperative support loan.
Fonterra must have a robust and transparent milk price, currently forecast at $4.15/kgMS for this season. The earnings per share forecast rose from 45 to 55c in January. The co-op has a dividend policy of paying 65-75% of operating profit over time.
He said the earnings per share will be reviewed in March and they will try to give a clearer signal as to the likely position at the end of year for farmers' budgeting purposes.
The only option for price smoothing was the interest free loan to farmers.
"It was good thinking by the management team. It clearly supports our view that the fundamentals in dairy are very strong," he said. "We are in a very difficult period right now.
"Being able to provide a loan which will work out at about $45,000 per average farmer doesn't solve the challenge for farmers but hopefully it assists cashflow in some way this autumn."
It comes from working capital being pulled out of the business as will be shown in the half year result.
