First signs of Fonterra's Oz turnaround

For years Fonterra has lost money in Australia. Photo / Supplied

Fonterra is now "running its own race" in Australia after last year's milk price implosion, the co-operative's managing director across the Tasman, Rene Dedoncker says.

For years Fonterra has lost money in Australia and the last two have been particularly difficult as the co-op was forced to match its larger Aussie competitor, Murray Goulburn's, high milk price.

But now, Australia, long the co-op's problem child, has emerged from the milk price debacle with a modest return to profitability.

Fonterra does not break out its earnings for Australia, but in its latest interim report, Oceania, which lumps together Australia and New Zealand, registered normalised earnings before net finance costs and tax of $74 million, against a loss of $38 million in the previous corresponding period.

"Overall, the signs are good. We are back in turnaround. We are seeing for the first time trading results that are modest yet positive, whereas in the last two to three years we have had some significant losses," he said.

Fonterra's problem last year was that, while it could see that Aussie milk prices were defying gravity, part of its supply agreement with Bonlac Milk meant that it had to match Murray Goulburn's milk price.

The resulting aggressive pricing environment meant all the Aussie processors struggled to maintain margins.

The bubble burst in April last year when Murray Goulburn slashed its A$5.60 per kilogram of milk solids farmgate milk price, which meant Fonterra could follow suit.

The impact was devastating for many Australian farmers and Dedoncker says he has spent much of the last six months talking over the issues with farmer groups, and individual farmers.

He acknowledged the cut had caused "enormous pain" for the sector.

The milk price implosion is now the subject of a Senate inquiry and Murray Goulburn has attracted class action law suits from disaffected investors.

In addition, the consumer watchdog, The Australian Competition and Consumer Commission (ACCC), is investigating last year's price cuts by Murray Goulburn and Fonterra.

These days Fonterra has cut its own path, offering a A$5.20/kg milk price, well over the Murray Goulburn price that it is contractually obliged to match.

"The milk price bubble that burst over here gave us the opportunity to set our own agenda.

"It means that we have been given a chance here to restore faith. We have taken that and the farmers are responding," Dedoncker said.

Up until last year's price cuts, Fonterra had been transforming the business and selling off non-performing assets.

Dedoncker said many of the hard yards were done by his predecessor, Judith Swales, but that he now had the opportunity to "operationalise" all the choices made by the co-op.

"We set our own milk price - not one linked to our competitor - and that today stands up as one of the best milk prices in the market.

"Our view is that if you want an enduring and sustainable business then you have to have a milk price that is a reflection of the market, and that's a combination of global forces and the portfolio mix that you have here," he said.

Australia is Fonterra's second biggest milk pool after New Zealand. Milk collection is growing and already represents close to 20 per cent of Australia's total milk supply.

Dedoncker said the Darnum, Victoria, infant formula joint venture with China's Beingmate, was performing well.

Chairman John Wilson talked last week about the possibility of replicating Fonterra-style structures abroad and Dedoncker said the co-op is in discussion with Bonlac over different models for the future.

"I can't comment specifically on where that will land," Dedoncker said.

Michael Harvey, Rabobank's senior analyst - dairy, farm inputs - said Fonterra and all the other processors had been put under pressure by the aggressive pricing over the last year or so and that the price decline had been a big challenge for the sector, coming as it did toward the end of a hot and dry season.

As it stands, prices for Aussie farmers are barely at break even, but he expects farms to return to profitability in 2017/8.