Photo / Sarah Ivey
Has the dairy industry passed its peak earnings days?
That's the inevitable question from Fonterra's annual results announcement.
It's obvious the dairy co-operative has been caught in a "game of two halves" in the 2014 financial year.
Fonterra's 10,500 farmer shareholders will be delighted the company has posted a final cash payout of $8.50 for the 2014 year.
But continuing declines in global dairy prices and market volatility played into company's decision to reduce its forecast farmgate milk price payout to $5.30 from $6 for the current season in line with prior announcements by other players such as Synlait.
This will have a major impact on farmer finances and rural economies with Westpac forecasting the drop from $8.40 to $5.30 implies a drop in revenues for the dairy sector of about $5.4 billion.
The Fonterra team: chairman John Wilson, CEO Theo Spierings and CFO Lukas Paravicini did not sugar coat the results.
In essence, the company is not only feeling the pinch from the diminished returns from sales of whole and skim milk powders on its Global Dairy trading platform, but it has also faced a margin squeeze on some of the highly profitably parts of its consumer and food ingredient businesses.
Spierings has clearly steeled his nerves for volatile times ahead.
The Chinese market is still constrained by an oversupply of backed up dairy inventory. Fonterra and other dairy players we have spoken to expect this to work its way through by mid-2015.
But geopolitical issues - such as the trading bans with Russia - have the potential to cause serious issues in that market.
As Spierings noted yesterday: one major weather event has the capacity to dramatically change the environment.
Fonterra is not resting on its laurels.
It plans to do more to support farmers - expect an announcement on this score next week - with moves to help rural communities.
It is also moving to boost the brand value of its products with a lot of attention being paid to placing a premium on the taste preference for NZ dairy products and mouth feel.
This is for the future.
But it is a sign that the company is not allowing the current squeeze to take its eye off the long-term future.
The recent global partnership with China's Beingmate - a leading infant food manufacturer in China - is seen by Spierings as "putting our high-quality dairy ingredients in a strong position to capitalise on the opportunity in China's rapidly growing infant formula market with a respected local partner".
The good news in the short term does help the local economy.
Wilson noted that the farmgate milk price on its own represented an injection of more than $13.3 billion for the economy for the season.
"It is a strong result, reflecting the determination of our farmer shareholders to lift on-farm performance, matched within the business by a focus on driving revenue," Wilson said yesterday. "Our farmers took advantage of good conditions to produce 1584 million kg/milk solids, 8 per cent more than last season, to make the most of the good prevailing prices early in the season.
The highlights from the results presentation at the Pullman Hotel in Auckland yesterday tell the story:
• Cash payout $8.50 - up 38 per cent.
• Farmgate milk price $8.40 per kg/milk solids.
• Dividend of 10 cents per share.
• Revenue $22.3 billion - up 19 per cent.
• Normalised ebit (earnings before interest and tax) $503 million, down 50 per cent.
• Net profit after tax $179 million - down 76 per cent.
• Earnings per share 10 cents - down 77 per cent.
• Total sales volumes stable at 4 million metric tonnes.
These are the metrics on which Fonterra's executive will be judged. They can expect strong scrutiny from Fonterra's 10,500 "passionate" farmer shareholders at their November AGM.
And while the election took place last Saturday, the Greens have not eased up using the forecast payout drop to mount a new attack on NZ's over-exposure to the dairy sector.
• Fran O'Sullivan is a business columnist for the NZ Herald and Alexander Speirs (right) is a business journalist for Herald Business Reports
This summer will be critical to discover if the sharks have started returning.