Fonterra insists Bonlac no worry

Fonterra insists a drop in profit at its big Victorian dairy operation Bonlac Foods is not significant and that the performance of its overall Australian business is what counts.

However, strategy and growth director Graham Stuart concedes that, while Fonterra is now getting a return on capital on its A$1.9 billion ($2.2 billion) business across the Tasman, the company needs to do better on profitability there.

Stuart's comments came after half-year results to December 31 from Bonlac showed a steep rise in costs and revenue - amid stiff competition for milk in Victoria and Australia - but only a small rise in gross profit from continuing operations. Overall profit too was to be slashed dramatically by the higher prices paid for milk.

Dairy farmer shareholders in New Zealand were keen to hear an explanation of what was happening at Bonlac, which Fonterra assumed full control of last year.

Stuart said yesterday that the legal entity Bonlac was no longer a commercial entity in its own right - its only customer was Fonterra and it was just one of a number of "cost centres" in an integrated operation in Australia.

Its level of individual profit was therefore irrelevant, given that it effectively served as a milk procurement and manufacturing operation feeding into the wider business.

The overall group profit was what was important and this was tracking in the right direction.

"In Australia ... we've gone from a position where we absolutely needed to improve profit, because we weren't achieving a return on capital, to a point now where we're getting our return on capital and we're just looking to build, as every business does, and make its profit higher."

Stuart would not disclose the level of profit in Australia. On whether Fonterra was satisfied with it, he said: "We're satisfied with the fact that we're getting a return on capital ... and it's heading in the right direction."

He noted that the price of milk in Australia continued to be an issue for dairy operators.

Drought, deregulation and the cost of water had helped depress production from around 12 billion litres of milk a year to 10 billion litres.

"It's probably not something that they'll recover from in the medium term."

Fonterra currently processes about 21 per cent of milk produced across the Tasman and sees Australia as "part of its home market".