Fonterra slashes milk price forecast

Fonterra cut its earnings forecast to 25 cents-30 cents a share and its dividend to 15c-20c in...
Fonterra has cut its farmgate milk price forecast for 2018/19.
Fonterra has cut its farmgate milk price forecast for 2018/19 to $6.00 to 6.30 kg of milk solids from a previous range of $6.25 to $6.50/kg, and has confirmed that its Tip Top ice cream business is up for sale.

The co-op, which is part-way through a stock take of its operations and assets, said in a market update for the first quarter of its financial year that it planned to go to full ownership of its Darnum, Victoria, milk powder facility and that its Tip Top icecream was up for sale.

Fonterra forecast earnings per share of 25 to 35 cents a share for the full year.

The co-op's first-quarter revenue came to $3.8 billion, down 4 per cent.

Fonterra chairman John Monaghan says the revision in the milk price was due to the global milk supply remaining stronger relative to demand, which has driven a downward trend on the GlobalDairyTrade (GDT) index since May.

"Since our October milk price update, production from Europe has flattened off the back of dry weather and rising feed costs. US milk volumes are still forecast to be up one per cent for the year," Monaghan said in a statement.

Fonterra said it was maintaining our forecast collections at 1,550 million kgMS.

Weather agency Niwa is saying its likely we will see an abnormal El Nino weather pattern over summer and this could impact our farmers' milk production, he said.

"Demand from China and Asia remains strong. However, we are seeing geopolitical disruption impacting demand from countries that traditionally buy a lot of fat products from us," he said.

Fonterra's first quarter gross margin of $646 million was down $14 million compared to the same period last year and up slightly on a percentage basis from 16.6 per cent to 17 per cent.

The Co-op's Ingredients business, despite lower sales volumes, performed solidly during the quarter with a gross margin of $273 million, up $28 million on last year.

The Consumer business also performed well with a gross margin of $310 million, up $10 million on last year, and volumes were up five per cent.

Chief executive Miles Hurrell says the Co-op generally makes a smaller proportion of its total annual sales in the first quarter due to the seasonal nature of our milk supply.

"This means the results from Q1 do not give much insight into the Co-op's expected earnings performance for the full year. It does, however, put the spotlight on where we have challenges that we need to address," Hurrell said.

Commenting on the board led portfolio review, Monaghan said there had been but that it would take time to flow through into financial results.

"We have reached an agreement in principle with Beingmate that will see us return to full ownership of the Darnum plant by 31 December 2018 and enter into a multi-year agreement for Beingmate to purchase ingredients from us," he said.

"We are also looking at our ongoing ownership of Tip Top and have appointed FNZC as our external advisor to work with us as we consider a range of options," he said.

"We want to see Tip Top remain a New Zealand based business and this is being factored into our options."

"While performing well, Tip Top is our only ice cream business and has reached maturity as an investment for us.

"To take it to its next phase successfully will require a level of investment beyond what we are willing to make," he said.

Fonterra said it was moving quickly to meet our commitment to reducing our debt levels by $800 million by the end of the financial year.

"This requires both improved performance from last year and the divestment of assets," Fonterra said.

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