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No trade wobbles in China for Fonterra

Thursday 21st March 2019

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Fonterra Cooperative Group hasn't faced any issues getting its products into China, where its business hit some speed wobbles when the butter market slowed.

The world's biggest dairy exporter counts China as one of its most important markets and has been a beneficiary of a burgeoning middle class in the world's most populous nation.

Tensions have emerged between members of the Five Eyes intelligence partnership - the US, UK, Australia, Canada and New Zealand - and China over accusations that the Asian nation's 2017 national intelligence law heightens the risk that technology firms such as Huawei Technologies will be used for espionage in vital western infrastructure. 

Anecdotes about New Zealand firms having issues clearing customs and an Air New Zealand plane turning around en route to China over sloppy paperwork are being interpreted as signs of a cooling trading relationship. 

Fonterra is among New Zealand's biggest players in China and says it hasn't witnessed any issues. 

"We've not had any issues with trade between Fonterra and China," chief executive Miles Hurrell told a briefing in Auckland yesterday. 

China delivers Fonterra's highest margins in consumer and foodservices, where buyers are willing to pay a premium for high-quality food. Weaker butter prices made buyers put off their purchases during the six months through January, and Fonterra wound down its inventories. 

The New Zealand dairy processor expects the second half will improve, and said the underlying performance in China remained strong. 

Fonterra's consumer and foodservice businesses in Greater China reported earnings of $61 million in the six months ended Jan. 31, down from $92 million a year earlier. Sales fell 13 percent to $524 million. That was largely in the foodservice side where gross margins were squeezed by the butter pricing. 

The dairy company's two-farm hub in China with 31,000 cows reported losses of $17 million in the half, compared to a loss of $12 million a year earlier. Milk production was down 15 percent at 113 million litres, when measured on a liquid milk equivalent basis, although a higher domestic milk price meant sales fell 12 percent to $108 million. LME is a standard measure of milk allocated to each product based on the amount of fat and protein in the product relative to the amount of fat and protein in standardised raw milk.

The farms faced higher costs due to more expensive effluent control and animal management, and also higher feed prices stemming from the US-China trade dispute. 

(BusinessDesk)

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