Something festive for Fonterra farmers? A hint of solace would be a start…

Fonterra’s  suppliers will be choking on their  Xmas  rations, as they  digest the  price  blows  the co-op  has delivered.  First,  the dairy giant has  revised down  its  forecast milk payout  range  for the season to $6-$6.30 from the  earlier  $6.25-$6.50, and, second,  it is clawing back  some of the $4.15/kg  advance payment  rate.

Farmers  in  January will be paid  $4/kg for the  milk they supplied in  December plus the  co-op  is  clawing  back  15c/kg for all the  milk  supplied   between  June and November.

It  is  not   surprising that farmers   with  costs of  production  running   at  or above  $6/kg  are  reported to  be  “shocked”  and  “angry”.   Even those  efficient  operators   who have  lower  operating costs  won’t be happy  with   Fonterra  saying it  “appreciates”  the budgeting impact  the updated $4 advance rate will have on farmers in  January.    

Since the  co-op  earlier   announced  its  first-ever  loss  (of  $196m)  for the  past season, the board  has been battling to  re-balance  its books and   most observers  see  its latest   move in  clawing back some of the advance  payment  as  keeping Fonterra  on the right  side of the  credit  rating agencies.

In an  update   on its    first  quarter, Fonterra  said  its  gross margin of $646m is down $14m compared with the same period last year and up slightly on a percentage basis from 16.6% to 17%.  Revenue of $3.8bn  is down 4% and sales volumes were down 6% to 3.6bn liquid milk equivalent (LME).

The co-op’s ingredients business, despite lower sales volumes, performed solidly during Q1 with a gross margin of $273m, up $28m on last year. The consumer business also performed well with a gross margin of $310m, up $10m on last year, and volumes were up 5%..

CEO 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 the 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.In particular, we are seeing challenges in our Australian Ingredients, Greater China Foodservice and Asia Foodservice businesses”.

Hurrell says progress is being made on fixing the businesses that are not performing.

On the board’s portfolio review,  chairman John Monaghan says there is a lot of action and progress but it will 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.  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.  We want to see Tip Top remain a NZ  based business and this is being factored into our options.

“While performing well, Tip Top 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.

“We are still some months off from completing the full portfolio review of assets, investments and partnerships.  We are moving quickly to meet our commitment to reducing our debt levels by $800m by the end of the financial year. This requires both improved performance from last year and the divestment of assets.”

Farmers   may  be   relieved   the  board  is   at last getting  to grips   with  the  co-op’s   dismal  financial  performance .   But  its  latest   moves  provide little   solace  to  suppliers  who  must find it galling the  co-op  is having to  sell  off  assets  like Tip  Top,   as well  as  extricating itself  from  its  disastrous  foray  into  the dud  Chinese company  Beingmate.

It  is even more galling for  Fonterra shareholders  to see  A2 Milk (which generates nearly all of its profits from a2 Platinum infant formula produced under contract by Synlait and sourced from around 70 Canterbury farms) with a greater capital value than Fonterra.  Who would think Fonterra once held a 50% stake in the original A2 milk patent?



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