Spierings: Higher prices not only push customers toward other milk products but also make substitutes such as soy or vegetable oil more attractive.
Fonterra Cooperative Group Ltd. Chief Executive Officer Theo Spierings said milk powder prices are too high and risk hurting the dairy industry unless they normalize.
"The distance between whole milk powder and the other milk products is too big," Spierings said in an interview in Auckland this week after Fonterra, the world’s largest dairy exporter, reported a 3 percent drop in earnings for the 2012-13 year. Higher prices not only push customers toward other milk products, they also make substitutes such as soy or vegetable oil more attractive, he said.
Prices have soared after a drought in New Zealand this year curbed milk production amid strong demand in key markets such as China. Fonterra yesterday raised its forecast payout to farmer suppliers to a record NZ$8.30 ($6.84) a kilogram of milk solids for the current year. Spierings said that could rise further if prices hold up.
"A very high payout is nice for the farmers, it’s not nice for the consumers," he said.
Fonterra buys milk to use in products from butter to baby formula, and can’t pass on all of the higher cost without reducing its competitiveness.
Spierings favors a milk price that yields "solid" earnings before interest and tax, which is "normally when whole milk powder is in a bracket of $3,500 to $4,000" a metric ton, he said. "Now we are at $5,200. It’s too high. If it stays for too long at a too-high level, it’s not good."
In regions like Africa, demand is already dropping off because of the affordability issue, "but China is so strong in buying whole milk powder, because there are issues of foot and mouth disease in the Chinese herd," he said. "So I don’t know how long it’s going to take."
China suspended imports of some Fonterra products in August after a contamination scare. While later testing revealed there were no health risks, bans on whey protein and base powders remain in place while safety assurance measures are improved. Those products represent 5 percent of Fonterra exports to China, said Spierings, who will visit the nation again next month as the company seeks to repair its reputation.
"Of course the situation is difficult, there’s a lot of angst and sometimes even anger," he said. "On the consumer side there’s still a lot of work to be done, because the consumers are still not 100 percent sure what happened. There’s still confusion out there."
China is New Zealand’s biggest dairy customer, buying NZ$3 billion worth of dairy products in the year through June.
Fonterra said earlier today that earnings before interest, tax and one-time items declined to NZ$1 billion in the year ended July 31 after the worst drought in almost 40 years drove up prices and squeezed margins. It warned yesterday that earnings in the first half of the current year will be "significantly lower" than a year earlier.