China dairy crisis tipped to delay price fall

World dairy prices are expected to remain high as China continues its buying frenzy. Pictured,...
World dairy prices are expected to remain high as China continues its buying frenzy. Pictured, milked cows returning to pasture near Momona this week. Photo by Craig Baxter.
A dairy supply crisis in China is likely to help delay any significant softening in world dairy prices - already at exceptionally high levels - until next year, analysts say.

China had been mopping up ''huge quantities'' from the internationally traded market and squeezing out many other buyers, a Rabobank report said.

Amid increasing evidence of a substantial contraction in the local supply in China, in the second quarter of 2013, it imported 27% more product than in the previous 12 months.

Pricing over the next six months would be driven by a combination of rising milk production, a delay in accumulating sufficient supply for export and the vigour of Chinese buying, Rabobank's director of dairy research New Zealand and Australia, Hayley Moynihan, said yesterday.

Most likely, the prospect of any significant softening in world prices had been delayed until 2014 and, even then, quite possibly until the second quarter of the year, she said.

Given the high milk prices, New Zealand farmers, on average, might increase supplementary feed usage throughout the season, to extend lactation through the second quarter of 2014, which could result in milk production growth and export tonnages ''surprising to the upside'', Ms Moynihan said.

This week dairy giant Fonterra announced, in a surprise move, a record forecast farm-gate milk price of $8.30kg/ms.

Yesterday, the co-operative confirmed a $6.16 payout for the 2013 year, comprising a farm-gate milk price of $5.84kg/ms and a dividend of 32c per share, which was higher than forecast at the beginning of the season but 4% down on the previous year.

The co-operative also released its well-signalled financial result, which saw revenue down 6% from $19.8 billion to $18.6 billion, normalised ebit (earnings before interest and tax) down 3% from $1.03 billion to $1 billion, and after-tax net profit up 18% from $624 million to $736 million.

Chairman John Wilson described it as a year that had tested the co-operative's resilience.

After a ''superb'' first six months for both production and performance, farmer shareholders endured a drought which, in some regions, was the worst in nearly 70 years.

New Zealand milk production dropped 9% in the last six months of the season and, overall, production declined 2% for the season to May 31, which hit both farmers and the business financially, Mr Wilson said.

The co-operative's strong balance sheet, with a debt-to-debt-plus-equity ratio of 39.6%, and operating cash flows meant it was able to support farmers through the drought's immediate impact by raising the advance rate paid to farmers for their milk. That change, however, contributed to a 28% drop in operating cash flows, he said.

While Fonterra had made good progress with its strategy during the year, climatic and market conditions frustrated efforts to achieve higher earnings, chief executive Theo Spierings said.

While the business achieved strong ebit growth in Asia, Africa, the Middle East and in its Soprole business in Chile, that was offset by a weaker second half from New Zealand Milk Products and a 37% decline in normalised ebit in Australia and New Zealand, as changes were made to the Australian business.

The drought caused ''unprecedented volatility'', which was reflected in a 64% spike in whole milk powder prices from January 2 to April 16.

That had a significant impact on the cost of milk bought by New Zealand Milk Products and meant the high returns achieved in the first half as a result of price premiums, product mix, cost savings and productivity gains were eroded in the second half, Mr Spierings said.

Although the New Zealand consumer business increased its earnings in a tough trading environment, Australia faced heightened competition for lower milk volumes, and a continuing margin squeeze for consumer brands.

Fonterra expected the significant reshaping of its Australian operations would ''turn performance around''.

Forsyth Barr investment adviser Andrew Rooney said Fonterra's result was marginally below market expectations and characterised by ''two extremely different halves''.

The first half was strong, driven by the New Zealand Milk Products processing business but, in contrast, that business was ''barely profitable'' in the second half.

The near-term outlook had not improved since management warned the market in late July and had, in fact, deteriorated. Forsyth Barr expected further negative earnings moves and retained a sell recommendation.


By the numbers
Revenue:
$18.6 billion, down 6%
Normalised EBIT: $1 billion, down 3%
Net profit after tax: $736 million, up 18%
Earnings per share: 44c, up 7%


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