Dairy exporters remain sanguine while other sectors (and investors) take a hit from coronavirus

Finance Minister  Grant  Robertson insists  NZ  is in a  strong position to weather  the fallout  from   coronavirus, even  though  Australia  has  declared it a  pandemic.

He underlines the  Crown accounts are  buoyant, the fundamentals of the economy are strong and  careful management has seen the economy continue to grow in the face of constant headwinds like international trade disputes and uncertainty over Brexit.

But he concedes there might be a need for fiscal stimulus.

We  are preparing for  multiple scenarios”.

He  says  the government is carefully monitoring the impact of coronavirus on all sectors.

 “We are ready to support our people and our businesses through any eventuality.

 “We believe it is sensible and responsible to plan for every possible scenario, but that does not mean we are predicting them. We are also at a stage in the 2020 Budget process where we can consider the policies required if we need them”.

Robertson’s aplomb might have a hollow ring for investors taking a thrashing in the sharemarket.

Clearly some sectors are  suffering  more than others  and  Westpac  bank  economists  have talked of  a  “significant blow”  to  the  NZ  economy from  the  coronavirus impact. Sectors such as  tourism, education and the logging industry  in  particular  are  under the  pump.

But for the country’s biggest export  sector  there has  been some  reassurance  this  week   with   reports  from  Fonterra  and  A2 Milk  on the state  of  their  sales to   China.

Fonterra confirmed   it is not  revising its forecast farmgate milk price range at $7.00-7.60kg/MS. The co-op reported it has signed deals with suppliers in China, which should offset the impact of the coronavirus.

CEO  Miles Hurrell  said the current situation is very fluid and uncertain.

“However, we have already contracted a high percentage of our 2020 financial year’s milk supply and this is helping us manage the impact of coronavirus. While there had been a slowdown in container processing at ports, products were continuing to be cleared by customs and quarantine officials.

The momentum we saw in the first three months of the financial year has continued, and as we approach the interim results our underlying earnings are tracking well.  However, given the potential significant risks that could arise from coronavirus in the second half, we are taking ant approach and maintaining our full-year forecast earnings range”.

ASB analyst Nathan Penny described it as a “reassuring and comforting” announcement, considering the speculation around coronavirus.

Meanwhile A2 Milk has reported a big jump in interim profit, boosted by strong growth in the Chinese infant nutrition market.  The company’s net profit climbed  21% to $184.9m in the December  half and revenue rose 31% to $806.7m. Chinese label infant nutrition sales doubled to $146.7m, and distribution expanded to 18,300 stores.

Acting CEO Geoff Babidge said the company expected strong revenue growth to continue, but he acknowledged the potential for the Covid-19 coronavirus to impact on supply chains and Chinese consumer demand.

A2’s products were “essential” for many Chinese families and revenue for the first two months of the second half is likely to be above expectations.

However, this is a dynamic situation and at this stage we are unable to quantify the impact, either positively or negatively, for the full year.”

One forecast A2 did make was a medium-term target for its operating profit margin, of around 30%.

This was lower than the first half due to a number of factors, including increased marketing costs, possible supply chain costs resulting from the virus in China, and the potential for “unfavourable” foreign exchange rate movements.

“Given the Covid-19 situation, we are assessing the level of discretionary marketing investment and trade marketing activation that can be effectively deployed in China for the remainder of the fiscal year,” Babidge said.

 

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