The European Union represents a key threat to a continuation of dairy market calm, evident in the latest GlobalDairyTrade results, Fonterra said, even as the co-operative itself unveiled a plunge into red, and the departure of its chief executive.
John Wilson, the Fonterra chairman, highlighted “support” for global dairy prices from a market balance showing “ongoing strong global demand for dairy and stable global supply”.
“The global supply and demand picture remains positive and we expect prices to stay around current levels,” he said, with the co-operative highlighting in particular import growth in China, which reached 3% last year, including 16% growth in the October-to-December quarter.
A continuation of flat prices would extend a trend evident at GlobalDairyTrade since an early-2018 rally ended, with whole milk powder values at Tuesday’s event rising 0.1% to defy expectations of a 4% fall.
‘May cause price volatility’
However, New Zealand-based Fonterra – which nudged higher by NZ$0.15 per kilogramme of milk solids, to NZ$6.55 per kilogramme of milk solids, its forecast for farmgate milk prices in 2017-18 – also cautioned that “an increase in European Union production may cause price volatility”.
The bloc is approaching its so-called “spring flush” period of peak milk output.
“We will be watching for any impact on market sentiment as spring production volumes build in Europe,” Mr Wilson said, with Fonterra noting 2% growth in EU milk output in the October-to-December quarter, representing a recovery given a 1% fall in production over 2017 as a whole.
‘Difficult to absorb’
The comments echoed a caution at the weekend from the US-based Milk Producers Council, which said that for international dairy prices “much depends” on prospects for European milk output, which appears to have continued its revival into 2018.
Preliminary data for the eurozone, which includes the likes of France, Germany, the Netherlands and Ireland but not the UK, “show January milk collections at 28.5bn pounds… up 4% from a year ago and 2% greater” than the former January record set two years ago.
The council said that output growth “is likely to” have slowed thanks to recent cold spells.
“Harsh weather in late-February and March has hampered milk production per cow.”
But looking ahead, “if Europe can achieve continued growth in milk production, it will be building on last year’s expansion, a surplus that the market may find it difficult to absorb”, the council said.
Into the red
Fonterra’s comments came as it unveiled a fall into loss of NZ$348m for the August -to-January period – compared with earnings of NZ$418m a year before.
The deterioration reflected in part a rise in butter and cream prices, which sent the group’s underlying operating profits down 25% to NZ$458m, despite a rise of 6.5% to NZ$9.84bn in revenues.
However, the group also took a charge for a NZ$183m payment to Danone, over a dairy product recall five years ago, and a writedown of NZ$405m, to NZ$244m, in the value of its 18.8% investment in Beingmate, the Chinese infant formula producer.
Beingmate has reported two successive years of losses, and seen its market shrink by 70% over the past five years, to 2.5%.
‘We’re not happy’
Theo Spierings, the Fonterra chief executive, said that the co-operative was “not happy about” its Beingmate investment, made in 2015, adding: “Let that be very clear because we’re not happy about the situation
“The way the business has been managed and the leadership of the business, that’s where we definitely want to see improvement,” he said, with Fonterra flagging “the appointment of new chief executive” at Beingmate and a “business transformation” as priorities at the business.
However, he added that “we think we still strongly believe that it’s the right investment from a strategic perspective.
“The baby food market is growing at 7% at the moment. There’s a lot of space in that market to grow. So strategically, we are fully behind this investment.”
And the group highlighted that Beingmate was only part of its strategy to exploit the key Chinese dairy market, which now accounted for 23% of group gross margin, and 28% of volumes.
Spierings to step down
Fonterra also revealed that Mr Spierings would later this year leave his role as chief executive, as part of a planned succession process.
“It is not yet clear exactly when any appointment for Theo’s replacement will be made, but it is absolutely clear that Theo will continue in the meantime to drive the co-operative’s strategy and business, with special emphasis on China,” Mr Wilson said.
Shares in Fonterra’s shareholders’ fund closed on Wednesday up 1.0% at NS$5.90 in Auckland.
Synlait shares hit record high
* Separately, New Zealand based Synlait Milk reported a jump in earnings for the August -to-January period to a record NZ$40.7m, up from NZ$10.6m a year before, on revenues up 52% at NZ$439.3m.
The growth was attributed to growing output and sales of higher-margin products, as well as improved profitability on other lines.
“The growth trajectory of canned infant formula has continued with total consumer packaged volumes almost tripling from the same period last year,” said John Penno, chief executive at Synlait, which supplies Chinese groups such as Bright Dairy, besides New Zealand peer a2.
Synlait Milk shares rose 3.5% to end at NZ$13.99, a record high close.
Source: agrimoney.com
