Drop in profit for Fonterra

Fonterra has posted a 53% drop in net profit for the half year to January, highlighting again the issues it has had with capacity constraints.

Profit dropped from $459 million to $217 million, and normalised earnings before interest and tax (ebit) were down 41% to $403 million, while revenue was up 21% to $11.3 billion.

The dairy giant has also maintained its forecast cash payout of $8.75, comprising a farmgate milk price of $8.65kg ms and a 10c dividend.

The profit struggles reflected the high input costs as well as the massive growth in global dairy demand that had exceeded all expectations, ASB rural economist Nathan Penny said.

While Fonterra anticipated high growth and had done well, it did not anticipate growth would be on that scale and it had effectively run out of milk powder processing capacity.

Meanwhile, it had to run its cheese and casein plants at a loss as cheese and casein prices lagged well behind milk powder prices, Mr Penny said.

Yesterday, Fonterra announced it was bringing forward planned capital investments, resulting in additional capital expenditure of $400 million to $500 million over the next three to four years.

Until that extra capacity came on line, there would be upward pressure at the margin on milk powder prices, particularly in whole milk powder markets given Fonterra's dominance, Mr Penny said.

Craigs Investment Partners broker Peter McIntyre said the market had taken the announcement ''in its stride''.

After trading between $6.10 and $6.20 on Tuesday, the Fonterra Shareholders' Fund lifted to $6.26 yesterday morning.

Despite profit being down, Fonterra was ''still making money'', although it was finding it harder to do so in the current environment, Mr McIntyre said.

He suspected Fonterra would find some relief over the next 12 to 18 months, as high commodity prices ''probably won't stay there forever''.

The co-operative was reinvesting in its business, which would please farmers, and farmers would also be ''pretty satisfied'' with the forecast milk price.

An $8.75 forecast payout represented close to $14 billion being injected into the New Zealand economy, which was ''pretty massive'', he said.

Forsyth Barr broker Haley Van Leeuwen said volatility in earnings of the levels experienced by Fonterra from the first half of 2013 to the first half of 2014 was unsustainable.

It was ''extremely challenging'' for investors to forecast an underlying level of sustainable earnings for Fonterra, given the board had the ability to engineer a profit outcome, she said.

Federated Farmers dairy chairman Willy Leferink said the focus should be on revenue, rather than the fall in profit, as that was ''real money'' coming into the New Zealand economy.

The fall in profit was concerning and reflected the higher cost of milk. Shareholders also needed to ''ask questions'' because the 10c dividend left ''a little bit of a sour taste'' in an otherwise spectacular half year, Mr Leferink said.

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