‘Sit tight, plan ahead and budget well’

Commenting on the half-year performances of Fonterra and Canterbury independent processor Synlait, Hoggard called on farmers to “sit tight, plan ahead and budget well”.

“The worst is not over yet, with farmers going into winter with the lower payouts starting to take effect and the drought affected regions, meaning farmers will be needing to buy in more supplementary feed than usual,” he says.

Fonterra dropped its dividend payout by 5c/kgMS while maintaining its milk price at $4.70/kgMS. For the six months ending January 2015, Fonterra recorded a 14% drop in revenue to $9.7 billion; net profit after tax stood at $183 million, down 16% over last year.

Hoggard says the drop in Fonterra’s dividend is disappointing. “The dividend’s role is to reflect the value in Fonterra’s value add products. The belief among farmers has been that a low farmgate milk price would then reduce the cost of producing value add products which would be reflected in a higher dividend returned to farmers. Obviously this isn’t the case so Fonterra will need to explain that well, and clearly, to their shareholder farmers.”

Synlait Milk has increased its 2015 forecast from $4.40/kgMS to a range of $4.50 - $4.70/kgMS despite posting a $6.4 million net loss for first six months.

 Hoggard says there is some good news for Synlait suppliers. “The bronze lining is that at least Synlait farmers’ forecast payout is now not looking so grim and they are now experiencing a similar level of pain to Fonterra suppliers,” he says.

Synlait Milk chairman Graeme Milne says it is expecting a much stronger performance in the second half of the financial year, on the back of selling higher-margin infant and nutraceutical products.

Milne is confident that despite market volatility it has sufficient committed contracts in place to achieve a forecast net profit after tax result of $10 million - $15 million for the full year. 

Fonterra chief executive Theo Spierings says the first half has been subdued for the co-op, due to high volatility and challenging global market conditions. “In the first quarter, opportunities to improve ingredients, consumer and foodservice gross margins were restricted until carryover inventory from the previous financial year was cleared.”

Spierings says Fonterra has a single-minded focus on delivering results – increasing sales volumes, reducing complexity and taking costs out to maximise returns. 

“To accelerate delivery of strategy, my team and I are leading a comprehensive business transformation programme. It will firmly embed the best features of entrepreneurial thinking, such as effectiveness, efficiency and agility.”

Fonterra Shareholders Council chairman Ian Brown says farmers expected their co-op to deliver a higher dividend than the 10c/kgMS interim dividend announced last week.

 “Shareholders rightfully want to see the strategy provide a return on their investment, especially given the low milk price environment farmers are currently experiencing.”

Last week Fonterra’s board and management held 40 farmer meetings to explain the results.