Fonterra’s chief executive Theo Spierings and chairman John Wilson say financial results did not go to plan in the third quarter.
Fonterra has announced an opening forecast price to its farmers of $7 per kilogram of milksolids for the 2018-19 season, and increased its 2017-18 forecast farmgate price by 20c cents to $6.75 per kgMS.
It also announced its third quarter financial results, which it described as “not the results it had planned”.
Although higher prices lifted its revenue to $14.8 billion for the first nine months of 2017-18, up seven per cent on the same period last year, its total milk volumes had fallen 5 per cent to 16 billion liquid milk equivalents.
This resulted in its gross margins declining to 16 per cent from 18 per cent for the first nine months of the year, compared to the same period last year.
While it will not announce its forecast earnings per share for the 2018-19 season forecast until July, Fonterra has revised its forecast normalised earnings per share guidance range for the 2017-18 season down to 25-30c per share and its forecast dividend range for the full year down to 15-20 cents per share.
Fonterra’s 2018-19 opening price forecast for farmers is ahead of last season’s closing price by 25c.
Chairman John Wilson said the revised earnings forecast for 2017-18 was disappointing for shareholders and unitholders.
“However, the total forecast cash payout for farmers increases to $6.90-$6.95 per kgMS which is the third highest payout this decade.”
Chief executive Theo Spierings said the co-operative had expected a more successful second half of the year but this had not happened because of a rapid rise in input costs late in the season into its value-add business.
“With the increase in the price of milk fats we have also seen continued demand towards products with a lower fat composition, sustained competition in Greater China’s foodservice market and further constraints in some Asian markets limiting our ability to pass through costs.”
The payment of damages to Danone of $183 million, and the write down of its Beingmate investment by $405m meant Fonterra’s gearing ratio was expected to be above its target 40-45 per cent range.
“While the strong milk price is good for our farmers, it does make the remainder of the year challenging for the business. We remain committed to maximising the total payout for our farmers and value for our unitholders by delivering the best possible earnings,” Spierings said.
Federated Farmers dairy chairman Chris Lewis said farmers would be in a position to do more environment work, continue to catch up on deferred maintenance from previous low payouts and look at possible pay increases for staff.
He said the payout increase could be credited partly to the devaluation of the dollar by four cents to as low as 68c against the United States currency the past month and commodity prices turning around. The baseline commodity of whole milk powder was at about US$3200 a tonne from US$2700-$3200 a year ago.
Milk powder demand is up around the world with a resurgence of butter and cream prices.
Lewis said the rise of televised cooking programmes such as My Kitchen Rules was promoting cooking at home with healthy, raw ingredients and dairy farmers would benefit from this.
A higher payout would be little consolation for farmers feeling the “pain” of Mycoplasma bovis cattle disease, he said.
“They haven’t the animals to milk and this is just adding to their frustration of moving away from future profits. It’s very sad and they are taking one for the team.”
Farmers received compensation for lost earnings until a farm was re-stocked, but that could take many months and there were still bills to pay.
“They have families to feed and how good is your credit line? But I think today is a celebration and this is positive news.”
Higher commodity prices would make it harder to increase share earnings as ingredients would cost more, but this was a good tension for Fonterra to improve value-added business, he said