By Ben Collins
WELLINGTON, New Zealand--The world's largest diary exporter, Fonterra Co-operative Group (FCG.NZ), said Monday that reduced margins across the business saw its after-tax profit and earnings decline in the year through July.
Still, it has increased its payout to farmers despite poor weather leading to lower milk volumes, and said there was stronger demand for its higher-value consumer products. Sales of its advanced ingredients category also rose 9% on-year.
Fonterra said its after-tax profit was 745 million New Zealand dollars (US$547 million), down 11% on-year, while its normalized earnings before interest and tax was NZ$1.155 billion, down 15% on-year. The profit equates to earnings per share of 46 New Zealand cents, down from 51 cents last year.
Global dairy companies are emerging from a deep downturn that crimped prices of everything from infant formula to whole milk powder used in yogurts and ice cream. Farmers from Russia to New Zealand had raced to expand dairy herds and convert land that had previously been earmarked for other agricultural uses to cash in on fast-growing demand for milk in emerging markets, led by China.
However, the boom created a supply glut as demand couldn't keep up with the amount of milk being collected. As a result, many farmers opted to cull cows to restrict production rather than continue absorbing losses. Falling dairy prices also led several banks to write down farm loans that had soured.
While global dairy prices still face some pressure from excess supply from New Zealand and Europe, they have improved after a soft start to 2017, when they tumbled to their lowest level in five months.
Dairy prices rose 0.9% to US$3,368 a ton at the Global Dairy Trade auction held 19 September, after dipping slightly in August and making strong gains through April and May.
Fonterra said in a regulatory filing that its cash payment to farmers in the co-operative for the year was NZ$6.52 per share, a 52% rise on the previous year. This is made up of a 40 New Zealand cent dividend and a farm-gate milk price of NZ$6.12 per kilogram of milk solids.
Fonterra has been concentrating on higher-value products, such as stretchy cheese that's a big hit in China. As well as the 9% sales growth in its advanced ingredients business, it said its consumer and food-service business sold more than 5.5 billion liquid-milk equivalents (LMEs), an increase of 576 million LME on last year.
"Despite lower milk volumes due to poor weather in parts of the season, the business delivered a good result by prioritizing higher value Advanced Ingredients and growing our sales of these in-demand and specialized products by 473 million LME this year," said chairman John Wilson.
Fonterra said its forecast payout to farmers for the 2018 fiscal year is between NZ$7.20 and NZ$7.30 per kilogram of milk solids, and that its earnings per share will be between 45 and 55 New Zealand cents. Fonterra Shareholders Fund (FSF.NZ), the listed arm of the co-operative, last traded at NZ$6.10.
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