Fran O'Sullivan and Alexander Speirs: Pressure on Fonterra

Fonterra chairman John Wilson will be pushed to come up with a plan

It's nailbiting times for the dairy sector as Fonterra posts a 16 per cent drop in its first-half net profit to $183 million and primes its farmer shareholders for a continuing cashflow squeeze.

The upshot is that pressure will be likely to come on the leadership of Fonterra - and other NZ major dairy companies - to finesse their strategies to combat continuing volatility in global dairy markets.

Yesterday Fonterra, like its smaller competitor Synlait, gave guidance on its forecast payouts for the current season. In Fonterra's case it has confirmed its earlier forecast of $4.70 per kg of milk solids, well down from the record $8.40 figure during the previous season.

In Synlait's case it has raised its forecast for the current season to $4.50 per kilograms of milk solids; closer to the Fonterra $4.70 projection and up from the previous forecast of $4.40 per kg of milk solids. Synlait cited a faster market recovery than expected as giving it the confidence to raise its forecast.

Fonterra's farmer shareholders would also have been disappointed that the company has trimmed its forecast dividend payout for the year to a range of 20c to 30c from a previous range of 25c to 35c a share, taking the total forecast payout for the year to $4.90 to $5.00 per kg. This puts the cooperative hard up against its overall cost of production, a position which is already putting Fonterra chairman John Wilson and chief executive Theo Spierings under pressure to devise strategies to combat the downturn.

This will be no easy feat.

At the press conference to announce the profit result, Spierings said he was worried about the geopolitical environment around the world including Russia and the Middle East. Wilson said upfront that the first-half results were below farmer expectations - a snapshot of tough conditions with variable production, demand and pricing: "There was also the challenge of generating profit from inventory made in the previous financial year when the cost of milk was higher, but sold in the first quarter of the financial year when global dairy prices were falling."

The problem is 2015 has not gone to expectations on the GlobalDairyTrade auction platform where much of Fonterra's commodity products are traded. The price index had been tracking up earlier in the year - a significant recovery on the December five-year low - but slipped back again last week.

This continued volatility prompted Wilson to caution farmers to plan their on-farm budgets carefully.

Farmers also have an expectation that Fonterra prepares its own budgets with care as Fonterra Shareholders' Council chairman Ian Brown warned.

Brown said shareholders had expected a higher dividend and "rightfully want to see the strategy" provide a return on their investment, especially given the low milk price environment farmers are currently experiencing.

He said the key to adding value long term was "a sound strategy" . It was important that shareholders understand the factors that influence the cooperative's stance.

Brown also suggested farmers ask questions of their board and management at the upcoming farmer meetings.

Spierings indicated yesterday there was some scope for Fonterra to improve gross margins on areas like ingredients, consumer and food services.

Synlait managing director John Penno said the company had given guidance to suppliers on the projected payout to enable them to plan their finances.