Landcorp, keen user of Fonterra's guaranteed milk price, looks to reduce dairy exposure

Tuesday 26th August 2014

Landcorp, New Zealand's biggest corporate farmer, has been an enthusiastic participant in Fonterra Cooperative Group's guaranteed milk price scheme as it reduces exposure to volatile dairy prices, while looking at ways to reduce the dominance of dairy in its portfolio.

The state-owned farmer's milk revenue soared 70 percent to $129 million in the year ended June 30, contributing to a more-than doubling of operating profit to $30 million. It won't see a similar benefit from dairy prices in the current year, given dairy prices have tumbled this year from their highs in February.

"We're making sure we don't get too reliant on dairy income so the more volatile dairy sector doesn't become too dominant in the portfolio," chief executive Steven Carden told BusinessDesk. Landcorp's strategy includes exploring fixed-price contracts, hedging and greater cooperation with customers across both dairy and meat, he said.

Fonterra trialed a pilot guaranteed milk price in the 2014 season, offering to sell 15 million kilograms of milk solids at $7/kgMS. The trial was more than twice over-subscribed, meaning participants were scaled back to just 40 percent of what they sought. Demand isn't quite as red hot in the current season. Up to 40 million kgMS was offered at $7/kgMS in June, attracting applications for 26 million kgMS. A further 20 million kgMS will be offered in December.

"We've pretty aggressively pursued the guaranteed milk price," Carden said. "I'm surprised more in the industry don't take it up."

Last week, Landcorp said operating profit would fall to a range of between $8 million to $12 million in 2015, missing the $20.5 million forecast in its statement of corporate intent and reflecting the slide in global dairy prices this year from their February peak. That slide prompted Fonterra Cooperative Group to slash its forecast farmgate milk price to $6 per kilogram of milk solids from $7/kgMS.

Over the medium to long term, the company will take steps to reduce exposure to commodity price cycles, including widening the range of livestock farmed and increasing its focus on red meat production of lamb, beef and venison, which have less volatile prices. The company is also looking at niche markets for products where it can have a direct relationship with customers.

One example is supplying livestock to Silver Fern Farms for sales under the house brand of UK supermarket chain Tescos, which includes "selling the Landcorp story," Carden said. The company is also targeting the high-end of the North American beef market, where there is demand for grass-fed, antibiotic-free meat for the table, competing against marbled, feedlot-produced meat.

Much of New Zealand's beef export trade to North America is for the ground meat, or hamburger market, but Carden said American consumers aren't wedded to the taste of marbled beef the way some Asian consumers are.

Costs rose 15 percent to $207 million in the latest year, reflecting the start of Landcorp's share-milking agreement with Shanghai Pengxin Group, which acquired the Crafar farms, and the expansion of its dairy conversion programme in the Waikato.

Carden said the partnership with Pengxin "has been a very positive one" and he would be keen to discuss a management role for the Lochinver Station in the central North Island, if the Chinese company can navigate a pre-election political backlash and gain Overseas Investment Office approval to buy the 13,800 hectare property.

Such a deal isn't certain as existing management are currently operating the farm. In Pengxin's acquisition of Synlait Farms in the South Island it left existing managers in place, Carden said.

The 2014 year had generated exceptional returns but Carden said farming is still "clearly on an upward trend."

"Despite the bottom-line impact of the projected fall in milk prices for 2014/15, Landcorp was well placed to continue to record sustainable profit growth over the medium term," he said. "We're very focused on initiatives to raise productivity and efficiency across our operations."

BusinessDesk.co.nz

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