Milk war hurting Fonterra’s revenue

By BRONWYN FARR, Australian Dairyfarmer Edition 532,

SUPERMARKET milk discounting has eroded half year results for New Zealand’s giant dairy co-operative Fonterra, which processes milk from about 1400 suppliers in Australia. Fonterra chief executive Theo Spierings said Australia/NZ revenue for the period to January 31 was down 4 per cent to $2 billion from $2.1 billion in the same period last year. The results reflected a challenging retail environment and an ongoing pricing battle that has resulted in pressure on major suppliers’ margins. Normalised earnings before interest and tax (EBIT) were $124 million, 19pc down on the six months to January 31 last year. “In Australia there is pressure from the retail war going on at the moment, so there is pressure on our branded business,” Mr Spierings said, adding that other factors including the high Australian dollar, rising costs and increased competition had played their part. Fonterra’s Australian suppliers are primarily in Victoria, but its presence is felt through many dairy brands including Western Star butter, Ski yoghurt and Mainland cheese. Overall, half year net profits increased by 18pc to $NZ346m, with revenue up 7pc and record milk collections up 10pc for the season to date. Fonterra chairman Sir Henry van der Heyden said the co-op had performed well particularly given the turmoil in global markets. “International dairy prices softened after last year’s highs but remained relatively stable throughout the first half of the year,” he said. “These prices were supported by strong demand for quality dairy ingredients in emerging markets across a number of Asian economies, as well as Brazil and China, offsetting economic uncertainty in Europe. “Although there is lower growth in our home market of Australia and NZ, these are great businesses generating good cash flows that we will defend at all costs” he said. “We see the potential to significantly grow milk volumes outside of NZ by developing a high quality local milk supply and integrating it more closely with our business in China. “Our pilot dairy farms in China are now producing some of the highest quality milk in the country and we are looking to accelerate the development of a quality milk supply in China and integrate that with our local business by manufacturing products for Chinese customers. “We don’t have to fully own the farms or factories – we can achieve the same result through partnerships and supply agreements, which is how we run our integrated businesses in Australia and Latin America.” Strong economic and population growth in emerging markets was expected to drive global demand for milk to rise more than 100 billion litres by 2020, with NZ expected to contribute only five billion litres of additional supply by that date. Mr Spierings said Fonterra’s strategy refresh was about growing volumes, targeting high-value areas of nutritional need and executing these plans at speed: “We call it the Three Vs – volume, value and velocity. “With overall demand growing, we need to grow volumes to protect our position as the world’s leading dairy exporter,” he said.