Milk Glut Drags Fonterra Forecast Down to $9.20/kgMS
A milk glut around the world shows no sign of easing, putting downward pressure on farmgate milk prices for the next few months.
The company’s milk pool in Australia has grown by 500 million litres in the last three months, mostly from farmers switching supply from the troubled co-op Murray Goulburn (MG).
Fonterra chairman John Wilson says its Australian plants have reached capacity and now have a waiting list of would-be suppliers.
“We have gone from picking up 1.6 billion litres of milk to just over 2 billion,” Wilson told Rural News.
MG’s milk supply had fallen from 2.7b L last year to under 2b L, and after suffering a net loss of A$370 million in 2016-17 the co-op put itself up for sale.
Fonterra and other Australian and global processors have bid for MG; they may have to get regulatory clearance to buy all or some of MG’s assets.
Wilson says MG is going through the process with its financial advisor Deutsche Bank AG.
“Our focus is on our business -- paying a competitive milk price we believe in and not based on what someone else pays,” Wilson says. “It’s to grow our consumer business in Australia and provide another source of high quality ingredients on top of NZ-sourced products.”
Wilson says Fonterra must grow its global milk volume.
“In Australia we are operating at full capacity and looking at how we de-bottleneck some of our plants by investing marginal capital to get more performance out of the existing asset base.”
Wilson believes the focus is no longer a comparison between the milk price in New Zealand and Australia, but rather a competitive milk price for Australian suppliers and a strong return on capital for farmer shareholders in NZ.
No pain no gain
Fonterra chief executive Theo Spierings says its Australian business is back on track after “a couple of years of pain”.
In the 2016-17 financial year, the return on capital from the Australian business reached 12%, compared to -8% in 2014-15.
He says Fonterra kept on believing in the business.
“We were under severe pressure for quite a while; we kept telling the market that this is a profitable business but it needs to be right-sized,” he says.
“We wrote down assets, reviewed product and brand mix and reduced cost.”
Spierings says the transformation took time and the business is now in pole position.
MG proposals arrive
Murray Goulburn confirms receiving “a number of confidential, non-binding indicative proposals”.
“These proposals have ranged from the sale of certain assets to whole-of-company transactions,” it says.
MG and its financial advisor Deutsche Bank AG are talking to several parties to assess their proposals, including valuation.
“At this point it is too early to make any comment about valuation or implementation.
MG notes there is no certainty that any transaction will eventuate,” the co-op says.
