Owen Hembry

Owen Hembry is the business news editor of the New Zealand Herald

Bumper Fonterra result comes with a warning

Andrew Ferrier. Photo / Steven McNicholl
Andrew Ferrier. Photo / Steven McNicholl

Records tumbled at dairy giant Fonterra's annual result yesterday, and chief executive Andrew Ferrier was bullish despite a volatile global economy.

Revenue, production, milk price, exports - the records came thick and fast on Ferrier's penultimate day in charge.

Revenue for the year ended July 31 was up 19 per cent at $19.9 billion, and profit was up 13 per cent at $771 million.

"The momentum inside the business is fabulous," Ferrier said. "And if you look at how the profitability has grown or you look at how the balance sheet has got stronger, there's been some consistency over the last several years which is particularly rewarding and it shows itself in a very, very good year."

The final payout before retentions for 2010/11 was a record $8.25 - comprising a farmgate milk price of $7.60 a kilogram of milksolids and a distributable profit of 65c a share.

The company also confirmed its forecast payout before retentions for 2011/12 of $7.15-$7.25, including a farmgate milk price of $6.75 a kilogram of milksolids and a distributable profit of 40-50c a share.

However, Ferrier said: "It remains a very volatile time and a delicate time, so forecasts are tricky. We're comfortable with where we are forecasting now, we see no need to change, but you need quite a crystal ball to see what's going to happen between now and July of next year."

The average price for a basket of products in Fonterra's online dairy auction has fallen since June 15, with an average winning price of US$3499 a tonne this week, compared with US$4826 on March 1. Fonterra had expected the market to soften and recover early next year, Ferrier said.

"We feel very strongly that in spite of all that volatility we've got a great business in Fonterra," he said.

"We're very resilient, we're going to be able to drive the profits up, and we're going to be able to continue to extract the absolute best returns out of global commodity prices and bring them back to be a very competitive milk price here in New Zealand and there's a fabulous outlook for the co-operative."

The food industry was more resilient than many other industries in tough economic times, Ferrier said.

"What we tend to see in markets like dairy is consumers won't necessarily stop consuming dairy but they might trade down from a brand to a private label for example.

"We're not immune and we would likely get some hit in probably the profitability of the business but we would not expect a major fundamental shock to the dairy complex, and to global dairy prices specifically, rising out of a softening of [the] global economy."

Sales of standard and premium ingredients increased 23 per cent to $13.8 million because of higher volumes and global dairy prices, Ferrier said.

Fonterra said its consumer businesses had made record revenue of $6.1 billion but margins had come under pressure from the rise in commodity prices.

Normalised earnings increased 12 per cent in the Asia, Africa and Middle East consumer business segment, were unchanged in Latin America but fell 17 per cent in Australia and New Zealand.

"We saw a large growth in world dairy prices and we have not been able to pass anywhere near the full cost of dairy prices through to New Zealand consumers," Ferrier said.

Chairman Sir Henry van der Heyden said Asia and the Middle East were becoming more important to the company.

"That part of the world we're still seeing good strong growth numbers, driven out of China, Indonesia, India."

The record fiscal performance and milk production meant Fonterra would distribute milk payments and dividends totalling $10.6 billion - $2.4 billion more than last year.

BNZ economist Doug Steel said Fonterra's result was good for the economy.

"Compared to the rest of the world, which is struggling to grow and pay back debt, we're doing a bit of both, which comes very much from the fact the world is buying our stuff at higher prices and dairy is very much at the forefront of that."

ASB rural economist James Shortall said the market would have had more confidence in the 2012 forecast if the New Zealand dollar had not remained so strong. He said a lift in dairy prices over the next few months would be needed to ensure the forecast payout was achievable.

- Additional reporting: APNZ

- NZ Herald

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