Fonterra price strips $225m from farmers

Forecast changes announced yesterday by Fonterra will reduce the co-operative's farmer incomes this season by about $225million, ASB senior rural economist Nathan Penny says.

Fonterra narrowed its current season farm-gate milk price forecast range by 20c from $6.30-$6.60 to $6.30-$6.40.

It also provided a 2019-20 opening season forecast of $6.25-$7.25, and signalled further changes within its business.

Adding non-Fonterra farmers into the mix put forecast nationwide farm incomes reducing by about $260million, he said.

For the average Fonterra farmer, forecast net milk price and dividend income would reduce by about $24,000, or $16,000 for non-Fonterra farmers.

The downward revision for the 2018-19 forecast came as a surprise, contradicting the lift in dairy auctions recorded over the past three months, Mr Penny said.

Overall dairy auction prices, including whole milk powder prices, had lifted about 5% since Fonterra's last update in February while the NZD/USD had fallen by a similar amount.

Fonterra chairman John Monaghan said the opening forecast for the new season was "realistic" and would be narrowed as the season went on.

Mr Penny described that forecast as "relatively healthy". Using the midpoints of the range, if realised, the forecast represented a 40c/kg gain on 2018-19.

In a statement, Fonterra chief executive Miles Hurrell said good progress was being made on the co-operative's strategy review.

He reiterated the benefits from those changes would take time to flow through into financial performance.

"I appreciate that our farmers and unit holders want clarity on our new strategy and expect a decent return on their investment," he said.

Fonterra was on track to share its new strategy in September. In the meantime, it was making decisions to reduce complexity and simplify its business so it could focus on where it had competitive advantages.

"Farmers and unit holders can expect to see some fluctuation in our earnings over the next couple of years and there will be one-off transactions and adjustments (some positive, some negative) as we reset the business and deliver on our new strategy," he said.

It had begun a strategic review of its two farm hubs in China, was reviewing options for the future ownership of its Brazil joint venture with Nestle, and was closing its Dennington site in Australia.

China remained a key market for Fonterra but that did not necessarily mean it needed to continue to have large amounts of capital tied up in farming hubs.

A review into future ownership options for Dairy Partners Americas Brazil joint venture and whether to sell was expected to be completed by the end of 2019.

On Wednesday, Fonterra began talking to the team at its Dennington factory in western Victoria about the "tough call" that had been made to close the site.

Fonterra's revenue for the nine months to April 30 was $15billion, up 1% on the corresponding period last year, and sales volumes were 16.6billion liquid milk equivalent (LME), up 4%. Normalised ebit was down 9% to $522million.

In ingredients, sales volumes for the first nine months were up 10% to 16.3billion LME, gross margin was down to 8.6% from 9.6% and ebit was down $64million to $602million.

In consumer and foodservice, sales volumes were down 1% to 3.8billion LME, gross margin was down to 22.8% from 23.6% and normalised ebit was down $62million to $266million.

The New Zealand ingredients business was performing as expected but Australia ingredients continued to face challenges. It was taking longer than planned to lift performance in some parts of the consumer and foodservice business.

Fonterra was reducing the forecast full-year normalised ebit for the whole ingredients business to $645million-$725million, down from $750million-$850million.

There were increased risks in the fourth quarter to the co-operative's previous forecasts.

Fonterra was revising its earnings guidance range from 15c-25c per share to 10c-15c per share.


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