Announcing the co-op's half-year results in Auckland today, chief executive Theo Spierings says high volatility and challenging global market conditions affected the business.
"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," he says.
"There is often a lag between when product is produced and when it is sold. During the first quarter, the value of our ingredients inventory was relatively high as it was mostly produced when Whole Milk Powder (WMP) prices were higher, ranging between US$2,700 to US$4,700 per metric tonne," he says.
"However, these higher inventory costs were not recovered due to rapidly falling Whole Milk Powder (WMP) prices in the first quarter of this financial year, which dropped to a low of around US$2,400/ MT.
"This gap between the value of inventory and selling prices created a margin squeeze in the first quarter. This contrasts with the first quarter last year when the value of inventory was based on a lower milk cost, and was sold at a higher price.
"In the second quarter this year earnings for ingredients improved, benefiting from the lower cost of milk."
Fonterra's consumer and foodservice business in Asia and China source all of their milk from New Zealand and benefited from the lower value of milk, particularly in the second quarter.
The co-op's Australian and Chilean consumer and foodservice businesses source their milk in market.
Spierings says their earnings were significantly impacted by higher milk prices within each of these milk pools which squeezed margins.
"In Australia, Chile and Brazil the prices paid for milk are influenced by in-market dynamics rather than global prices, so our businesses in these markets have faced higher input costs."
The co-op's Sri Lanka business has turned around and improved earnings after rebuilding the market share lost, following the temporary suspension of operations last year.
Spierings says despite some challenges, the consumer and foodservice business overall achieved volume growth and improved pricing, together delivering a $91 million increase in gross margin.
"Normalised EBIT for consumer and foodservice for the first half was $116 million, an increase of 23% per cent on the prior comparable period," says Spierings.
