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?