Low milk prices — while difficult for farmers — are favourable to the manufacturing side of the business.

Cash-strapped dairy farmers can at least look forward to a strong first-half performance from Fonterra when it reports its result this week.

While farmers are suffering under very low milk prices, the current environment is favourable for Fonterra as low prices mean lower input costs for the manufacturing and dividend-paying side of its operation, which paves the way for higher margins for its value-added products.

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Forsyth Barr analyst James Bascand expects the co-operative's normalised earnings before interest and tax to leap 83 per cent from $376 million to $687 million, and for an increased interim dividend to 18.5c from 10c, reflecting lower inputs and a big turnaround in the business.

Better news on the dividend front would partially offset at least some of the load facing farmers, who are producing milk at about $1.35 per kg below the average cost of production.

Mark Lister, head of private wealth research at Craigs Investment Partners, said the extent to which Fonterra is prepared to support its farmers financially could be a potential negative for its already stretched balance sheet, and for its share price.

"[Fonterra] will be under the microscope because the sector is in a difficult spot," he said. "They won't get through completely unscathed, but generally things are ticking over pretty well for them," he said.

Fonterra has hinted that it may unveil support measures for farmers at next week's result. Analysts said that could take many forms such as "hard" financial assistance or "soft" assistance such as seminars and farmer hotlines.

Assistance could come in the form of a soft loan scheme similar to the one rolled out last year, or paying out a greater proportion of its earnings from the current policy of paying out 65 to 75 per cent.

ROTORUA DAILY POST
20 Mar, 2016 12:00am
4 minutes to read

The performance over the half to January 31 would compare to a poor showing in same period a year earlier, which was hit by abnormally high inventory costs.

Overall, the year is shaping up to be a strong one. Craigs Investment Partners expects annual earnings before interest and tax to hit $1.35 billion from $974 million last year, and for its net profit to hit $827 million from $506 million. Fonterra's own forecast is for earnings per share to hit 45c-55c for this year, with a final dividend of 35c to 40c.

Lister said he expected Fonterra's ingredients business to be strong, and for its Asia performance to be solid over the half-year.

Fonterra performed major surgery on its loss-making Australian business last year and next week's result is likely to show still more red ink, but with signs of improvement.

The co-op's debt position deteriorated last year, heading towards a gearing ratio of 50 per cent, but Forsyth Barr's Bascand was confident it would decline to about 45 per cent towards the end of this year.

Among other key points, farmers and investors will be seeking an update on Fonterra's investments in farms in China, and its 18 per cent stake in China's Beingmate. Fonterra's result is due on Wednesday.