Fonterra's loss-making Australian operation is likely be in the black this year now the co-operative is paying a more realistic milk price, chief executive Theo Spierings has said.

He told a special meeting of shareholders last week that Fonterra's three-year "transformation" plan would put it in profit next year, but with the Australian milk price at A$5/kg ($5.22/kg) a return to profitability was likely to come sooner.

Fonterra, due to its contractual relationships, has had to match the main dairy company in Australia - Murray Goulburn - which up until recently was offering A$6/kg.

Spierings went on record last year as saying milk price paid in Australia was too high and unreflective of market conditions.


Both Fonterra and Murray Goulburn are being investigated by the ACCC - Australia's equivalent of the Commerce Commission - over the notice and timing of the milk price cuts, which happened this year.

In answer to a question, Spierings said the transformation programme in Australia was about "fixing the leaks" and improving relationships with retailers. "That journey alone would have taken us above the water line next year, but with that reset in the milk price right now, we are surfacing above the water straight away," Spierings said.

But he said Fonterra was running into supply constraints in parts of Victoria, the home of 80 per cent of Australia's export dairy production.

The rebuilding of its Stanhope plant, in northern Victoria, damaged by a major fire in 2014, meant Fonterra needed more milk "and the competition landscape around Stanhope is completely different". Fonterra's main collection regions are Tasmania and most parts of Victoria.

Murray Goulburn - Fonterra's larger competitor in Australia - said on April 27 that its A$5.60 farmgate milk price was no longer achievable, revising it down to A$4.75 to A$5/kg.

On May 5, Fonterra Australia revised its farmgate milk price from A$5.60 to A$5. Murray Goulburn also heavily revised down its earnings forecast for the 2015/6. Its units - listed on the ASX last July - slumped by more than A$1 from A$2.14 just before the April 27 announcement.

Managing director Gary Helou and chief financial officer Brad Hingle have resigned and there have been a string of resignations from the board. Investors have since launched a class action against the company.

Fonterra had a contract with Bonlac Supply Co to buy milk from farmers at a price not less than that offered by Murray Goulburn. The basis of the ACCC's investigation is whether the firms misled farmers.

The sudden drop in milk prices has caused a furore in the farming community and on the political scene as Australia faces an election in July.

At Friday's special meeting, Fonterra's plan to alter its governance structure was defeated as it failed to achieve 75 per cent support.

Sir David Fagan will appear in a video campaign with other sporting greats. Photo / Alan Gibson
Sir David Fagan will appear in a video campaign with other sporting greats. Photo / Alan Gibson