Fonterra payout up on $506m profit
We will be more than ready when the market turns.
Dairy giant Fonterra has raised its forecast payout to farmers and seen annual profit jump 183 per cent, despite a challenging year which resulted in plans to cut hundreds of jobs.
The co-operative, New Zealand’s largest company, will pump an additional $1.3 billion into the economy via farms if its new payout for this season eventuates. The forecast of $4.60 per kilogram of milksolids was up 75 cents on the previous $3.85/kgMS.
The news comes days after Fonterra confirmed hundreds more jobs are set to go, just as the 523 staff made redundant in July finish up. Fonterra chief executive Theo Spierings said this year’s market conditions were the most difficult he had experienced, with volatile prices for dairy products.
‘‘The global dairy industry has been hit simultaneously by geopolitical turmoil in the Middle East and Russia, Ebola in Africa, an economic slowdown in China and the sharp drop in oil and mineral prices. These events suppressed demand at a time when farmers all around the world had ramped up production in response to previous high prices,’’ Spierings said.
‘‘This resulted in an inevitable impact on pricing. Looking ahead, this uncertainty means that world markets are likely to be difficult in the medium term. However, we will be more than ready when the market turns.’’
In its annual result, released yesterday, the company also posted a net profit after tax of $506 million, up 183 per cent for the year ended July 31.
Fonterra’s net profit the previous year was $179m, down 76 per cent. Its pre-tax profit slumped by 50 per cent, from $1b to $503m.
Chairman John Wilson said extremely challenging trading conditions globally had affected all parts of the business, with global dairy prices falling.
Fonterra had also spent significantly to increase capacity to support New Zealand milk growth, and had invested in China.
Fonterra is providing an estimated $430m in financial support for farmers to help them cope with the low payout.
Wilson said that despite drought in some regions and floods late in the season, milk collection across New Zealand was up 2 per cent. A lift in profitability in the second half of the financial year was expected to carry through into the current financial year.
Federated Farmers dairy vicechairman Chris Lewis said the extent of the lift surprised him and would be well received by farmers.
The revised forecast payout was made up of a forecast farmgate milk price of $4.60/kgMS and forecast earnings per share of between 40c and 50c.
The forecast total payout available to farmers in the 2015-16 season is now between $5.00/kgMS and $5.10/kgMS. ‘‘I was picking $4.50 to be honest,’’ Lewis said.
Federated Farmers’ Chris Lewis says the extent of the forecast payout is a surprise and will be well received by dairy farmers.
Fonterra has also lowered its forecast milk production for the season by 5 per cent.
‘‘That signalled that farmers have already made their changes to their systems this year – culled cows, reduced bought-in feed. It’s also been a very cold, wet spring and there could be a further drop in production,’’ Lewis said.
Most farmers, including Lewis, would still be facing a loss this season, although a higher payout would minimise. The 25c per share dividend would take some of the gloss off the payout lift, but Lewis agreed it had been a tough year for Fonterra and all dairy farmers.
DairyNZ economist Matthew Newman said the forecast lift would come as a huge relief to farmers, but it was still a challenging season.
About 70 per cent of dairy farmers would not be able to meet their core costs this season, down from 90 per cent of farmers with the previous $3.85 payout.
‘‘It’s a step in the right direction, but it doesn’t make for a great season,’’ Newman said.
He estimated that the extra 75c equated to an extra $1.35b that farmers would receive this year.
DairyNZ’s break-even payout for dairy farmers was $5.30 this season. Under the new payout, a fully shared-up farmer would receive $4.15 this season in total.
‘‘What it means is that there is still $1.15 required to pay the bills. They can get 50c of that from Fonterra, but it still leaves 65c of additional funding required for the average farmer,’’ Newman said.
Federated Farmers national president William Rolleston said the increase would help lift spirits, but was unlikely to mean a profit for farmers. However, it would likely mean that farmer pessimism had ‘‘bottomed out’’.
Rolleston said the changes farmers had made to stock numbers, supplementary feeding, halting capital spending and deferring maintenance had put them in a better position to benefit from the better forecast.