Fonterra slashes dividend forecast, keeps milk price unchanged in face of price squeeze

Wednesday 11th December 2013

Fonterra Cooperative Group slashed its forecast 2014 dividend payment by two thirds, while keeping its targeted farmgate milk price at a record high, saying high milk powder prices haven't been matched by cheese and casein.

The world's biggest dairy exporter cut its dividend forecast to 10 cents a share from 32 cents while keeping the milk price at $8.30 a kilogram of milk solids.

Units of the Fonterra Shareholders' Fund, which are entitled to the dividends from Fonterra shares, fell 2.1 percent to $6.10 yesterday. Craigs Investment Partners analyst Arie Dekker yesterday cut the units to 'sell' and lowered his 12-month price target to $5.51, citing the price squeeze.

"They are in a slightly difficult position where they have to balance the interests of farmers with the interests of investors in the Fonterra shareholders fund so I would read this as attempting to balance that," said Matt Goodson, managing director at Salt Funds Management, which has a small holding in the Shareholders' Fund.

"The price had a tremendous run since IPO and it seemed to be almost a slight misunderstanding of exactly what the shareholders fund was, some people seem to think it was a just pure play on overall milk prices or overall milk industry health but as we have seen today it is a little different to that," he said.

The announcement surprised economists who had been predicting an increase in the milk price and Fonterra's board confirmed it had used its discretion to keep the price below the level implied by the Milk Price Manual calculation. That would have seen the price forecast lifted to $9 per kgMS, it said today.

Fonterra calculates the milk price based on its assumed costs to produce a basket of milk powders. But in reality, only 70 percent of production capacity is for milk powder and the rest of its plant makes cheese and casein, whose prices haven't kept up with milk powder.

"The gap between prices for milk powders compared to cheese and casein is greater than it has ever been before," chairman John Wilson said. Because Fonterra's factories include a number of cheese and casein plants "we are not able to maximise profits from these plants in the current environment."

Last month, Auckland-based Fonterra took 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 had squeezed margins.

Today Fonterra forecast 2014 earnings before interest and tax of $500 million to $600 million. It didn't specify whether this was a 'normalised' figure. Normalised EBIT was $1 billion in 2013.

Chief executive Theo Spierings said Fonterra was "limited by the nature of Fonterra's existing production facilities in New Zealand" and was already pushing the maximum possible volume of milk into whole and skim milk powder streams.

As part of a strategy to lift milk powder production, Fonterra today announced it had approved spending of $235 million for a third powder drier at Pahiatua in the Lower North Island. It held the official opening of its drier at Darfield, the world's largest, last weekend.

"Over the next few months we will look at additional measures that will further improve our ability to provide higher volumes of the dairy commodities global customers want - when they want them," Spierings said in the statement.

BusinessDesk.co.nz

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