New Zealand’s giant dairy co-op, Fonterra, is back in its leadership role in the country’s key export industry, feeding a revival of optimism among its 10,000 farmer-owners as it reports a “positive” half year result alongside a strong forecast farmgate milk price.
Fonterra CEO Miles Hurrell summed it up neatly when he said :
“Despite the major impact Covid is having around the world…it’s during these times you really can see what makes our co-op special”.
Hurrell himself can take a fair chunk of the credit for turning the co-op’s fortunes around, after the previous executive regime cost it billions.
He said the co-op had a “great” first half. Although revenue was down slightly to under $10 billion, earnings from China rose by more than a third.
“Our standout performer continues to be Greater China. EBIT from China rose 38% to $339m, reflecting the strength of our foodservice business, improvements in consumer business, and China’s strong economic recovery following the initial impact of Covid-19”.
Total group normalised EBIT was $684m, with normalised profit after tax of $418m— and an interim dividend has been declared of 5c.
Hurrell says Fonterra is pleased with its reported after-tax profit of $391m.
“While down on this time last year at a headline level, the previous year benefited significantly from the divestments of DFE Pharma and Foodspring”.
As part of its continuous review of its asset portfolio, the co-op has decided to undertake a sales process for the JV farms in China. Hurrell says the decision to sell these farms is in line with the co-op’s strategy to focus on NZ milk.
It has also continued to reduce its investment in Beingmate, which is now down to 2.82%.
Fonterra’s sales book is well contracted but Hurrell says that, as a result of some small shipping delays, the product inventory is higher than it was this time last year. This means the investment in working capital is also higher.
“By the end of the financial year we expect this to be back to more normal levels as we have confidence in our supply chain to get product, already contracted, delivered to customers”.
Hurrell says NZ dairy is proving to be resilient in a Covid-19 world.
“It’s a staple in people’s diets around the world and demand is strong.
“Despite a strong first half we are expecting our earnings performance to come under significant pressure in the second half. The strong milk price is great for farmers. It’s good for NZ too —with a mid-point range of $7.60, it would see us contribute more than $11.5bn to the NZ economy. However increasing raw milk prices put a lot of pressure on our sales margins and this will be seen through the second half of the year”.
Fonterra’s farmer-owners, however, understand that outcome: that’s why they defend the co-op structure, although some outsiders believe global investors would be queuing for a stake if they could get it.
Meanwhile farmer-shareholders are relishing the achievement of Hurrell and his executive team in getting Fonterra back on track—as well as offering the prospect of a close-to-record payout.
The rest of the country, particularly those who damaged industry morale with their “dirty dairying” label, should welcome the co-op’s performance, too
It’s another piece of Fonterra’s outstanding work under Hurrell’s leadership that the industry is reducing its environmental footprint. Fonterra has worked with farmers to develop farm environment plans and 42% of supplying farms now have one. Hurrell says they are well on the way to the target of 100% by 2025.
Moreover Fonterra is expanding a promising plantain trial to improve waterways and is testing whether a new feed additive can reduce methane emissions.
This is the kind of work that confirms Fonterra’s foundation role in the dairy industry—and in the NZ economy.