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Fonterra rides out storm

By Hugh Stringleman

Friday 25th July 2003

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Fonterra Co-operative Group made the best of a difficult trading year by ripping into its stocks to have a positive influence on world prices.

The 2002/03 result announced this week ­ a $284 million surplus ­ confirmed the payout to suppliers of $3.63/kg milksolids.

Chairman Henry van der Heyden said the giant co-operative sold 30% more New Zealand dairy ingredients in 2002/03 than the previous year, plus some US milk powder. But domestic production was up only 3%.

On May 31 Fonterra had 24% of annual sales volume in stock to carry it through the offseason months June to August. A year earlier it had 34%. This was not just a volume reduction but a significant improvement in the quality and value of the remaining inventory, he said.

Fonterra took advantage of the much lower Australian drought-affected export production and was rewarded with a useful lift in world prices by season's end.

It is now directing more production toward whole milk powder, which is bringing the best returns. About half the total production this season will be in milk powder.

Total production in 2002/03 was 1.94 million tonnes, up 11%, and total sales were 2.39 million tonnes, including sales to the New Zealand Milk subsidiary and via the Dairy
Concepts agreement with Dairy Farmers of America.

Asked whether Fonterra might have achieved a better result for shareholder-suppliers last season by not quitting inventory at the bottom of the market, Mr van der Heyden said it had been necessary to reduce stocks before the world price responded.

But there is an upper limit to the improvement.

The US export intervention price for whole milk powder is $US1700 a tonne, above which it will start selling from its stockpile.

Mr van der Heyden predicted world dairy prices in the coming season would be less volatile. The directors could therefore forecast a milksolid payout of $3.80/kg, compared with $3.63 last season.

The final payout in 2002/03 to 13,000 shareholders and their sharemilkers was $4.1 billion, down from $5.9 billion in the previous year.

That $1.8 billion reduction ­ a fall of 30% ­ has flowed through the regional and national economies as farmers shut their chequebooks. Fonterra offset two-thirds of the currency appreciation effect on payout by hedging.

Chief financial officer Graham Stuart said the co-operative was completely covered at 52USc, which would partially protect the payout again this year. Next year might be another story, as the New Zealand dollar was at 58USc, with a recent high of 60USc.

Fonterra declared a surplus after payments to suppliers of $284 million (compared with a deficit last year of $50 million), largely the result of the sale of its Latin American business to the joint venture with Nestle.

That surplus is to be retained to fund new investments.

The co-operative also drove down costs, taking out $200m million in operating costs, $300 million by selling businesses and $150 million resulting from the New Zealand dollar appreciation.

Fonterra stayed ahead of the business case in delivering merger benefits, at an annualised figure of $206 million at balance date.

It now says the "gap" between the independently set commodity milk price (CMP) benchmark and the actual milk return (AMR) is 25c/kg, compared with 39c a year ago.

Total assets have fallen by nearly $1 billion to $10.7 billion and the shareholders' equity ratio has improved from 38% to 43.4%.

The equity backing per kilogram of milksolids supply is now $4.21 and the fair value of a Fonterra share has risen 53c to $4.38.

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