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.
The remaining $190m will be deducted from farmers’ milk cheques when the advance rate climbs above $6/kgMS, expected about August next year.
Fonterra farmers were hit by low farmgate milk prices in 2014-15 ($4.40/kgMS) and 2015-16 ($3.90/kgMS).
To ease cashflow on farms the co-op loaned $383m to 76% of its farmers; the loan was interest-free until June 1 this year and farmers have since been paying 2.4% interest. Repayments were to start only when the payout surpassed $6/kgMS.
Fonterra chairman John Wilson says the loans were “highly successful” for farmers, providing cash when they needed it.
“We did it based on our confidence in the global dairy market that once we got above $6/kgMS we would initiate the first loan repayment,” he told Rural News.
Wilson says he is also proud of the assistance the co-op’s subsidiary Farm Source provided to farmers during the downturn. “Farm Source is a lot more than what used to be called RD1. The Farm Source business has to provide a return to Fonterra while passing lower costs on to farmers.”
He says an average farmer saves 10c/kgMS by shopping exclusively at Farm Source rather than at other rural retailers.
“That’s extraordinary; if you are a young farmer up against [market] volatility that makes a huge difference.”
During the downturn, Farm Source extended interest-free and deferred-payment terms to 4000 farmers, redeeming $17.8m of reward dollars.
Fonterra last week announced a final milk payout of $6.12/kgMS for the 2016-17 season; with a dividend of 40c/share that makes a total cash payout of $6.52/kgMS.
For the year ending July 31, 2017 revenue increased 12% to $19.2 billion, and rising prices offset a 3% decline in volumes (22.9b liquid milk equivalent).
Normalised EBIT of $1.2b was down 15% as a result of reduced margins across the business, which also influenced net profit after tax – down 11% at $745m.
Wilson lauded the co-op’s ability to maintain its forecast dividend despite the milk price increasing by 57% over the year and the impact of negative returns.
At a glance
- 2016-17 total cash payout $6.52/kgMS, up 52% on last season’s farmgate milk price of $6.12/kgMS and dividend of 40c/share
- Revenue $19.2b, up 12%
- Normalised EBIT $1.155b, down 15%
- Net profit after tax $745m, down 11%
- 46c earnings per share
- Large growth in consumer and foodservice: extra 576 million liquid milk equivalent
- Advanced ingredients sales growth up 9%
- Group return on capital 11.1%.
