Fonterra is “humming” in China, according to a headline in the NZ Herald, although the text of the article beneath it mentioned the “woes” associated with the co-op’s investment in Beingmate.
The co-op is having to absorb an impairment of $405m on the value of its 18.8% holding in Beingmate. On top of the $183m payment it has had to make French giant Danone, the writedown takes the gloss off that otherwise “humming” performance.
Some of its farmer-shareholders may be looking over the fence to the rather different outcome for A2 Milk, which lifted its annual sales 68% in the June year, with revenue rising from $549m in the June 2017 year to $922m. During the latest year A2 Milk achieved gross margins up to 49%.
A2 Milk said last week it anticipated “further growth in revenue particularly in respect of nutritional products” and planned to lift its marketing spend as a percentage of sales, and to hire more staff in China.
While Fonterra’s suppliers are receiving a better payout in the season just ended, the higher milk price has put pressure on the co-op’s earnings in a year which had already proved challenging due to the payment to Danone and the impairment of the Beingmate investment.
As a result, the co-op had to revise forecast normalised earnings per share guidance range down to 25-30c per share and the forecast dividend range for the full year down to 15-20c per share.
Chairman John Wilson, at the time the co-op issued this guidance, conceded the business’ revised earnings forecast “is disappointing for our shareholders and unitholders”.
Disappointing might have been an understatement.
Whether the total forecast cash payout for farmers will assuage suppliers – at $6.90-$6.95 per kgMS it is the third highest payout this decade – remains to be seen.
Chairman Wilson has been in the line of fire from cabinet ministers (as well as possibly his own shareholders) but is still expected to be confirmed for another term. On his watch, Fonterra has invested $755m in Beingmate and another $800m in setting up big dairy farms there.
His task as industry leader is not made easier by the threat hanging over dairying from Mycoplasma bovis.
Suppliers will have to hope that despite the under-performance of the Beingmate investment, the co-op’s China business can deliver the kind of sales growth relative minnows like A2 have racked up.
Point of Order 
We were having the same argument about Fonterra in Australia a few years ago amd now Fonterra is the dominant player there. Beingmate was expensive but Fonterra farmers have done amazingly well out of China if you look at the bigger picture. No one accepts that the loss is OK, and Fonterra has other shortcomings but $6+ payouts are the bottom line for farmers.
Fonterra will not be broken up like some are hoping for with these partial arguments.
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