Fonterra says it is optimistic milk powder prices will recover, even as the world’s biggest dairy supplier reported a drop in interim profits and slashed its forecast dividend payment due to “tough conditions”.The New Zealand-based dairy co-operative said on Wednesday that it expected a supply glut in China would ease over coming months, although global instability in the Middle East and Russia continues to hurt the industry.
“I’ve been constantly saying the situation in China has to change,” Theo Spierings, Fonterra chief executive, told the Financial Times. “[Supply in] China will turn to a deficit and if it turns to a deficit then there is a positive impact on milk prices. I stick by my point that milk prices have to be at around US$3,500-US$4,000 [a tonne] for milk powder in a relatively short period of time.”
His comments came as Fonterra reported a 16 per cent fall in profits after tax to NZ$183m for the six months through January 31, compared with the same period a year earlier. The company cut its forecast full-year dividend payment to 20-30 cents per share, from a previous forecast of 25-35 cents.
Units in the Fonterra shareholders fund fell 7.2 per cent on Wednesday.
Global milk prices have fallen by a third over the past year as New Zealand, Europe and the US produced more milk than expected, and as demand in China has grown more slowly than anticipated. The imposition of sanctions by Russia on EU producers and instability in the Middle East are adding to the supply glut.
The dairy industry faces a further challenge from the March 31 expiration of a 30-year quota system capping milk production in the EU, which will allow producers to increase production.
But Mr Spierings said he did not expect a negative impact on prices as Ireland was the only country planning to increase its milk powder output. Other European countries would probably increase cheese production, he said.
Mr Spierings admitted a food contamination scare in China in 2013 and a recent anonymous threat to poison baby milk formula in New Zealand had been a distraction.
“If we could have spent our time in markets selling what we are spending now in managing together with government these threats — it would have been time better spent.”
He said it was still unclear what financial impact the poison threat incident would have on the company.
Fonterra accounts for more than a quarter of New Zealand’s goods exports, with China its single biggest market.
Figures from New Zealand’s national statistics office on Wednesday showed a 41 per cent drop in exports of milk powder, butter and cheese in February from a year earlier. Overall exports dropped 13 per cent year-on-year to NZ$3.9bn in February, falling short of forecasts for NZ$4.1bn.
Dairy prices have begun to recover since the start of the year, but at the most recent auction last week the GlobalDairyTrade index of dairy prices fell 8.8 per cent, the biggest drop at the New Zealand-based auction in nearly a year.
Source: Financial Times
