Fonterra earnings to fall as farmers cash in

New Zealand dairy producer refuses to cut high prices paid to farmers despite forecasting 50pc earnings fall, triggering shareholder backlash

PUBLISHED : Thursday, 12 December, 2013, 3:29am
UPDATED : Thursday, 12 December, 2013, 3:29am

New Zealand's Fonterra has forecast a 50 per cent fall in earnings this year, hurt by higher farm-gate payments for milk and factory constraints that have held it back from making the most of record dairy prices.

Fonterra, which controls nearly a third of the global dairy trade, said it would slash dividend payments for outside investors by 70 per cent, knocking units in its share-trading fund to their lowest since its launch a year ago.

But in a win for its 10,500 farmer owners, it opted to maintain record high farm-gate prices, angering investors and highlighting the risks of a mixed co-op model that is being eyed by other farm bodies, such as Australia's Murray Goulburn.

"Why would anyone want to put money into this company now?" said Darren Sissons, a portfolio manager at Portfolio Management in Toronto, which owns shares in the fund. "Their ability to raise more capital in the international market is going to suffer."

Fonterra said it expected 2013-14 earnings of NZ$500 million (HK$3.2 billion) to NZ$600 million, down from NZ$1.02 billion a year ago.

Global dairy prices have jumped 50 per cent this year on buoyant demand for milk powder in countries such as China for use in infant formula and food products.

But Fonterra said increased demand had pushed up farm-gate prices, while its milk powder plants had struggled to keep up, forcing it to turn some expensive raw milk into lower-value cheese products.

"We have not been able to lift powder production above the current 70 per cent level as we are limited by the nature of Fonterra's existing production facilities," said chief executive Theo Spierings.

Units in the share-trading fund fell as much as 10 per cent before closing down 5.7 per cent at NZ$5.75.

The co-operative turned to outside investment last year to help fund its plans in China.

Fonterra raised US$400 million by offering units in a share-trading fund to outside investors in exchange for a share of the co-op's dividend stream.

A similar model is being eyed by other co-operatives like Australia's largest dairy producer Murray Goulburn, which is planning a partial share float to tap extra capital as it competes in a takeover battle for Warnambool Cheese and Butter Factory.