Update: Synlait lifts milk forecast while Fonterra reaffirms   25 Mar 2015

Update: Synlait lifts milk forecast while Fonterra reaffirms its one, trims dividend

By Fiona Rotherham

March 25 (BusinessDesk) - Synlait Milk has increased its forecast market milk price upwards for the 2015 season to a level closer to Fonterra Cooperative Group's, which was reaffirmed in the Fonterra interim results today.

Synlait said its forecast would rise from $4.40 per kilograms of milk solids to a range of $4.50 to $4.70 kg/MS, following the market recovering faster than expected.

Fonterra confirmed its forecast payout for the current season of $4.70 kg/MS, down from a record $8.40 kg/MS last season, with guidance for dividends trimmed to a range of 20 cents to 30 cents, from a previous 25 cents to 35 cents. The world’s largest dairy exporter said its 16 percent drop in first-half profit to $183 million in the six months to Jan. 31 reflected tough conditions in dairy. Sales declined 14 percent to $9.7 billion.

Units in Fonterra Shareholders' Fund, which give holders access to the cooperative's dividend stream, dropped 4.2 percent to $5.74 when market trading opened on the NZX, and have declined 0.3 percent since the start of the year. Shares of Synlait were unchanged at $2.90 and have declined some 9.4 percent since the start of the year.

Synlait's managing director John Penno said recent volatility had shown the outlook remains fragile. The Rakaia-based dairy company said the increase should help Synlait suppliers manage their finances with more certainty given "how financial difficult the current season is for suppliers".

Meanwhile, Fonterra's revised dividend guidance means the total cash payout for 2014/2015 would be $4.90 to $5. Not only were conditions in the industry tough, said chairman John Wilson, but Fonterra also faced the challenge of generating profits on inventory from the previous financial year, when the cost of milk was higher, but was sold in the first quarter of the current year, when global dairy prices were falling.

"These first-half results are below our farmers' expectations, in a period when the farmgate milk price is low and we are reducing the forecast dividend range," Wilson said.

“Oversupply from dairy producing regions around the world in the early months of the financial year saw the trade-weighted GlobalDairyTrade price index hit a five-year low in December," he said. "Supply outweighed demand and buyers undervalued milk, which was reflected in prices that declined to unsustainable levels. Lower commodity prices placed downward pressure on our farmgate milk price in the first half."

A partial offset was a benefit from the decline in the New Zealand dollar, which helped add about 30 cents/kgMS to the forecast farmgate milk price, as at Jan. 31, he said.

Performance was mixed across Fonterra’s three key divisions, ingredients, consumer and food service, and international farming.

The ingredients business revenue was down 23 per cent, reflecting 45 percent lower dairy commodity prices during the first half compared to the same period last year. Normalised earnings before interest and tax for the first half was $299 million, up two percent compared to the same period last year, with operating costs up $43 million to support its new global strategy and higher storage and distribution costs in the US and New Zealand.

Volume across the consumer and foodservice businesses was up 27 percent to 840,000 metric tonnes in the first half, compared to the same period last year, while normalised Ebit rose 23 per cent to $116 million due to improved pricing and strong volume growth in China, a recovery in Sri Lanka and a strong performance from its food service business in Asia, which sources milk from New Zealand and benefited from lower milk prices.

Fonterra now has two farming hubs in its international farming division with nine productive farms. Milk production volumes increased to 67,000 MT for the first half because of new farms coming on stream, but normalised Ebit was down $29 million in the first half because of the higher livestock revaluation adjustment in the first half of last year not being repeated this year.

Fonterra didn't give a forecast for full-year earnings. Chief executive Theo Spierings said the cooperative remained committed to the strategy it formulated three years ago but said the change had been not been easy.

He said to speed up delivery on the strategy, the management team was working on a business transformation programme that will require some tough decisions. “We have made good progress so far but we need to increase the pace of change,” he said.

ANZ rural economist Con Williams said feedback from Fonterra’s farmer shareholders showed they want a tougher approach.

“There’s two key things in the outlook, an improvement in the operating environment, some of which is outside Fonterra’s control, and speeding up the execution of reshaping the business. That reflects farmer shareholders having a harder edge with cash flow likely to be tight in 2015,” he said.

At current estimates, the total payout will mean many farmers will fail to break even this year, especially those worst affected by the dry conditions.

While the sector can handle one tough year, two in a row would be a different story.

ANZ is forecasting a milk price forecast of $5.75 kg/MS for the 2015/2016 season, which won’t be announced by Fonterra until May. China remaining absent from the market, Russia moving well down the major importer ranks, some oil-dependent countries’ weaker economies and Europe looking to pounce on New Zealand markets remained the main influences on the future path of dairy prices, the bank said.

(BusinessDesk)

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