Synlait plans to double premium payments to suppliers this financial year

See also: New milk products place Synlait on trajectory for record profit results

UPDATED:  Synlait Milk [NZX: SML] managing director and chief executive John Penno says its farmer suppliers can expect 50 cent per kilogram of milk solids from exchange rate benefits in next season’s payout.

When asked about the outlook for global dairy prices, Penno said things would remain difficult next season with low international prices until European farmers stopped increasing production, which had pushed supply and demand out of balance.

But he said there’s likely to be a reduction in the exchange rate between this financial year and next which could lift next season’s payout by an extra 50 cents “to push it near to $5 (kgMS)”.

In February Synlait cut its forecast farmgate milk price for this season to $4.20/kgMS from $5/kgMS but Penno warns that’s likely to be further reduced when the company updates its forecast in May.

Yesterday outgoing Westland Milk Products chief executive Rod Quin warned low milk payouts were likely to continue for another two seasons as the Hokitika-based dairy cooperative lowered its predicted payout for this season by 10 cents to between $3.90 to $4.00/kgMS which aligns with Fonterra’s forecast $3.90/kgMS.

Quin and Westland chair Matt O'Regan said their conclusions were based on a recent trip to Europe, where the expectation is that output will continue to expand and international markets will be more aggressively targeted.

Synlait said today it expected to relieve some of pain for their cash-strapped farmers with premium payments expected to double this financial year to $6 million, mainly on the back of a boom in canned infant formula sales.

More than half of its suppliers will receive the premium payments which average 20 cents/kgMS, but Penno said it won’t be enough to make them profitable this season given the low forecast farmgate payout.  For the second year running, Synlait is advancing a higher proportion of its final milk price than normal to support farmers though a difficult period of cash flow.

An expected 5 percent drop in milk production from existing suppliers along with an expected four-fold increase in canned infant formula sales this financial year were behind the Rakaia-based dairy processor signing up an additional 28 suppliers which will take its numbers to 201 from next season. Penno said milk production was expected to drop even further next season as farmers have cut stock numbers and supplementary feeding to reduce on-farm costs. “But we have taken that into account,” he said.

The half-year results show value-add milk premiums were $2.22 million compared to $723,000 a year ago. The company is the exclusive manufacturer of a2 Platinum formula, sourced from herds that only produce a2 type beta-casein protein. A2 Milk accounted for just under half the premium payments in the first half.

The big rise in premiums for the full year is based on expected higher A2 Milk sales and the introduction of Grass Fed infant formula.

Synlait’s partnership with US-based Munchkin Inc to exclusively produce Grass Fed infant formula is expected to be launched in New Zealand and Australia in May.

“We’re anticipating that will do well as a differentiated product. Customers are willing to pay a bit more for products perceived to health or nutritional benefits to their children,” Penno said.

The Grass Fed formula is expected to go on sale in China later in the year and in the US next year.

The first trial batches have been manufactured for clinical studies in the US which Penno said was a tougher market than China to get regulatory approval for infant formula.

Analysts have said Synlait is poised at the start of a sustained period of earnings growth and today it reported first-half underlying net profit of $12.3 million for the six months ended Jan. 31 from $400,000 a year ago with a greater push to value add through increased infant formula sales.

Nutritional sales for the first half were 7,498 MT, a 155 percent increase on a year ago and accounted for 16 percent of total sales. Synlait has forecast profitability is on track to be a record this financial year.

Penno said the company, in which Shanghai-based Bright Food has a 39.1 percent stake, was based on finding value-add opportunities and building momentum over time.

“This result is the beginning of tangibly demonstrating that’s starting to happen,” he said.

Synlait shares rose almost 3 percent to $3.14 today and have gained 6.8 percent in the past 12 months.

(BusinessDesk)