Double whammy from Fonterra results

Fonterra has kept its farmgate milk price forecast at $4.70. Photo / Mark Mitchell

Expectations that a higher dividend from Fonterra would at least partly offset a low milk price went by the wayside yesterday when the co-operative lowered its dividend forecast range for the current year and reported a 16 per cent drop in its first half net profit to $183 million.

As expected, Fonterra kept its farmgate milk price at $4.70, but lowered its dividend forecast range to 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 per kg - still below the average cost of production.

Units in the NZX-listed Fonterra Shareholders Fund, which give non-farming investors access to the co-op's dividend, closed down 43c, or 7 per cent, at $5.56 after the announcement.

In theory, lower milk prices are an advantage for the manufacturing and dividend paying side of Fonterra, and chief financial officer Lukas Paravicini said that held true for Fonterra's China and Asia food service operations - which account for 15 per cent of the overall business. But the same could not be said for its Australian and Latin American operations, which experienced high milk prices.

Paravicini said Fonterra's gearing ratio - debt to debt plus equity - jumped to 50.7 per cent from 44.6 per cent a year earlier - driven mostly by higher capital expenditure.

Revenue from China - Fonterra's biggest market - dropped to $1.2 billion in the six months ended January 31 from $3.15 billion a year earlier.

"We are still in a supply-rich and demand-weak environment, and that clearly includes China," Paravicini said. In Australia, where Fonterra has struggled in recent years, the company had built strategic relationships with the major supermarket chains - Coles and Woolworths.

See Fonterra's video presentation to shareholders here:

The co-op had made progress in cutting costs in Australia, Paravicini said, but it needed to solve problems with its yoghurt business to completely turn it around.

The co-operative had previously estimated that production would be down 3.3 per cent compared with the previous year but recent rain throughout much of the country meant it would be more like 2 per cent lower.

Increased supply from dairy producing regions around the world in the early months of the financial year saw the trade-weighted GlobalDairyTrade price index hit a five-year low in December.

Chief executive Theo Spierings said opportunities in the first quarter to improve ingredients, consumer and foodservice gross margins were restricted until carryover inventory from the previous financial year was cleared. Fonterra declared a 10c per share half-year dividend, up from 5c for the same period in the previous year. Revenue over the half year dropped by 14 per cent to $9.7 billion.

• Fonterra expected to hold forecast
• Dairy farmers pin hopes on dividend
• Global Dairy Auction: International dairy prices fall by 8.8 per cent
• Jamie Gray: Wild swings look like becoming part of the dairy landscape

Looking ahead, Spierings said volatility in world commodities markets looked likely to continue while high levels of geopolitical uncertainty remained. ANZ rural economist Con Williams said farmers could handle one year of low payouts, but two together would be an issue.

"China remains absent, Russia is moving well down the major importer ranks, some oil dependent countries' economies look in trouble, Europe is looking to pounce on several key New Zealand markets and there has been substantial downward pressure on cost structures," he said.

"These five dynamics, along with Southern Hemisphere seasonal conditions, remain key for the direction of dairy prices now and well into 2015/16."

See recent movements in the Global Dairy Trade auctions here:

Fonterra*

• Revenue, down 14%: $9.7b

• Net profit, down 16%: $183m

• Per kg of milksolids farmgate forecast, unchanged: $4.70

• a share dividend forecast, previously 25-35c: 20-30c

*Six months ended January 31