Fonterra NZ, Australia milk collection drops in season to date

Fonterra Cooperative Group [NZX: FSF] says milk collection is down in New Zealand and Australia, its two largest markets, in the first 11 months of the season during a period of weak dairy prices.

Milk collection across New Zealand fell 3.3% to 1.499 billion kilograms of milk solids in the season from June 1, 2015, through April 30, 2016, with all of the decline coming in the North Island while good weather conditions kept South Island production unchanged, Auckland-based Fonterra said in its Global Dairy Update. The 2015/16 season forecast has been revised to 1.558 billion kgMS, down 3% from the previous season, it said.

"Lower milk collections are largely a result of the low milk price environment, with farmers reducing stock rates and supplementary feeding to reduce costs," Fonterra said. "We are currently seeing favourable weather conditions across many dairying regions, supporting late season milk production."

In Australia's July 1-to-April 30 season to date, the milk collection was down 1.7% to 107.6 million kgMS "as a result of unfavourable pasture growth due to dry conditions across most dairying regions, especially Victoria."

Global dairy prices have stayed lower for longer as global production amid a global oversupply and weak demand. Fonterra said today that milk production has been strong in the European Union and eased in other major exporting countries. Exports were strong in New Zealand, Australia and Europe but down in the US due to increased domestic demand. China, Asia and Latin America continue to see strong growth in dairy imports while imports have softened in the Middle East and Africa.

"It continues to be a tough season for our farmers with pressure on the farmgate milk price due to the supply and demand imbalance in the global dairy market," the company said.

Fonterra confirmed that to help support farmers through this time of "extremely tight cashflows," it will make early payment of a final 20c cent dividend in two increments in May and August, taking its annual dividend to 40c a share. The first 10c increment will be paid June 7. It maintained its forecast earnings per share of 45-55c cents.

Units of the Fonterra Shareholders' Fund, which are entitled to the dividends from Fonterra's farmer-owned shares, last traded at $5.73 and have declined 4.3% this year.

The dairy processor said its gross margin improved to 22% in the nine months through April 30, from 17% a year earlier. Revenue was lower as a result of commodity prices while a focus on cost control saw operating expenses decline 3% to $1.9 billion, it said.

"This strong performance reflects New Zealand ingredients continuing to achieve improved product mix returns and efficiencies, and improved gross margins in consumer and foodservice, supported by volume growth and lower input costs."

Its International Farming Ventures unit, which provides access to locally sourced, high-quality milk, was progressing as planned, it said.

"We retain our focus on reducing on-farm costs and good operating performance. However, earnings continue to be impacted by the development phase of the business and by the low domestic milk price in China," Fonterra said.

The company said it's on track to achieve a gearing ratio of between 40-45% by year end.

(BusinessDesk)