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Fonterra takes $157M provision against value-added inventory after margin squeeze

Monday 11th November 2013

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Fonterra Cooperative Group said it has taken a $157 million provision against inventory of specialised ingredients and branded consumer products produced by its largest NZ Milk Products division because rising input costs squeezed margins.

The first-quarter provision is disclosed in Fonterra latest Global Dairy Update, which for the first time includes key metrics from NZ Milk.

The company makes the distinction between its 'reference commodity products' used to calculate the farm gate milk price - whole milk powder, skim milk powder, buttermilk powder, butter and anhydrous milk fat -.and the value-added products made from the reference products.

"In the first quarter of the 2013/14 financial year the relative increase in the price of reference commodity products was significantly higher than the increase in the price of non-reference commodity products," the company said. "This resulted in a margin squeeze" and in some cases products being sold at below the cost of inputs.

In the first three months of the year, NZ Milk recorded sales of reference commodities of $5.97 billion, up 62 percent from a year earlier, while non-reference products rose 22 percent to $6.93 billion.

NZ Milk sold 365,000 metric tonnes of reference products in the quarter, little changed from a year earlier, and 128,000 metric tonnes of non-reference products, down 14 percent. In the same period, its product volume of reference products rose 7 percent to 630,000 metric tonnes and output of non-reference products gained 0.5 percent to 196,000 metric tonnes.

Units of the Fonterra Shareholders' Fund fell 2.5 percent to $6.65.

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