Fonterra to Boost Milk Powder Production as Profit Slumps

March 26, 2014 04:58 AM


With milk prices near a record, it costs Fonterra more to make other products with the milk it can’t process into powder.

March 26 (Bloomberg) -- Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said it will accelerate investment in milk-powder production to meet global demand after first-half profit slumped.

Fonterra today said profit in the six months through January fell 53 percent even as revenue jumped 21 percent because a lack of capacity meant about a quarter of the milk collected had to be made into loss-making products such as cheese. The Auckland-based cooperative will spend an additional NZ$400 million ($343 million) to NZ$500 million over the next three to four years to increase milk-powder production, it said.

"About 25 percent of our portfolio is product which we potentially would not like to make at this point in time," Chief Executive Officer Theo Spierings said in an interview with Bloomberg Television. "We will fast-track investments to create flexibility so we can optimize our product mix."

Soaring demand for milk powder from China is boosting New Zealand exports and helping to drive one of the fastest economic expansions among developed nations this year. With milk prices near a record, it costs Fonterra more to make other products with the milk it can’t process into powder.

Fonterra opted to accept lower margins to protect market share rather than attempt to recover costs by raising prices, Spierings said. It earned negative returns on cheese and other products that don’t track milk powder prices, he said.

Second-Half Outlook

Shares in the Fonterra Shareholders Fund, a publicly traded trust that tracks the cooperative’s dividend payout and earnings, gained 5 cents to NZ$6.27 at 2 p.m. in Wellington.

While first-half revenue climbed to NZ$11.3 billion, net income was NZ$217 million compared with NZ$459 million in the same period a year earlier. The second-half result is likely to be lower than the first half, the company said.

Fonterra maintained a record forecast payout to its 10,000 farmer shareholders for the 2013/14 season of NZ$8.65 per kilogram of milk solids, and said it will also pay a full-year dividend of 10 cents.

"A forecast cash payout of $8.75 represents a NZ$13.8 billion injection into the New Zealand economy," Fonterra Chairman John Wilson said. "An estimated 50 cents in every $1 of payout is spent by our farmers locally, meaning the benefits will be felt in urban as well as rural communities."

The economy will grow about 3.5 percent this year, according to the central bank, which this month started to raise interest rates to contain inflation.

Contamination Scare

Prime Minister John Key was in China last week to strengthen ties with New Zealand’s biggest trading partner, which were threatened by a Fonterra contamination scare last year. The incident was later found to be a false alarm.

Spierings says Fonterra’s relationships in China are "very good" and it is on target to product 1 billion liters of milk from its own farms there by 2020.

Since its inception in 2001, Fonterra has invested NZ$1.8 billion in extra capacity at its sites to meet increased milk supply and growing demand for milk powder, Spierings said, adding milk-powder production has doubled since 2004.

"We will continue down this path but at a faster pace, ensuring assets come on stream ahead of expected increases in milk production," he said. "Even with fast-tracked investments, adding capacity will take time so we also have a program in place to increase throughput in existing plant during the 2015 financial period."

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