Fonterra forecast a 5 per cent drop in milk production in the current season, which is expected to be supportive for milk prices.
Fonterra forecast a 5 per cent drop in milk production in the current season, which is expected to be supportive for milk prices.
Earnings rise seen as step in right direction.
Financially strapped dairy farmers have been offered a lifeline with Fonterra reporting a big turnaround in annual profit and a much improved forecast cash payout for the current year.
The dairy giant said its net profit after tax came to $506 million in the year to July 31 - up183 per cent from the previous year's abnormally low profit.
Fonterra's latest profit was short of previous years' outcomes but was seen as a step in the right direction after what has been a trying time for a sector that has been plagued with oversupply, subdued demand and low dairy prices.
ANZ said the result confirmed it had been a tough financial year for dairy farmers, with profit of $600/ha - the weakest result since 2008/09 and nearly half the 10-year average.
"The upgrade to the 2015/16 forecast will be welcome, but the outlook for farm profitability remains constrained," ANZ said.
The result was well received by the sharemarket, with the price of units in Fonterra Shareholders' Fund closing up 24c yesterday at $5.48, after reaching $5.50 at one point.
Fonterra, which was placed on a negative "credit watch" by ratings agency Standard & Poor's in August, said its gearing ratio rose to 49.7 per cent from 42.3 per cent a year earlier, but was 46.4 per cent when adjusted for a $900 million advance payment to farmers.
The co-op has in the past aimed for a gearing ratio of 40 to 45 per cent. Chief executive Theo Spierings said: "It's still not where we want it to be, but it is close."
Federated Farmers dairy chairman Andrew Hoggard said news of a 25c dividend for 2014/15 would give farm finances a welcome boost.
"Cashflow for most farmers is pretty low, and almost everyone is in overdraft, so having that injection is going to help out quite a bit," Hoggard said.
He said Fonterra's profit turnaround showed there was light at the end of the tunnel.
"It's still going to be a damned tight season, but it's looking a bit better now."
The slump in commodities prices was reflected in Fonterra's revenue for the year at $18.8 billion - down 15 per cent on the previous year.
Fonterra stuck with its 2014/15 farmgate milk price of $4.40/kg of milk solids which, together with the dividend, takes the final cash payout to $4.65 compared with a record $8.50 in the previous year.
Chairman John Wilson said the lift in profitability in the second half of the 2015 financial year was expected to carry through into the current financial year.
The co-op said the sharp increase in earnings was the result of a stronger second-half performance in difficult market conditions.
"Extremely challenging" trading conditions globally had affected all parts of the co-operative's business.
Fonterra also forecast a 5 per cent drop in milk production in the current season, which is expected to be supportive for milk prices.
The strengthening performance in the second half resulted in normalised earnings before interest and tax almost doubling from the first half, with growth in the co-op's consumer and foodservice businesses and a major push in the ingredients division offsetting low milk prices with improved margins.
It's a good effort ... but result far from comforting
The announcement of the 2015 Annual Result for Fonterra held at the Pullman Hotel. Photo / Jason Oxenham
Fonterra's management has delivered a good result under extremely tough circumstances. But let's not get carried away. It is not a great result, and the numbers are still far from comforting.
It will be tempting for the public, looking at a $500 million profit, to wonder why the job cuts? Why all the gloom?
It's a big number but it has to be viewed in the context of the company's $18.3 billion revenue.
And it doesn't capture the squeeze on farmer incomes as the payout has slumped. Since the dairy price crash Fonterra has moved decisively to address production issues, moving more product into the high value end of the business.
It has shortened supply on commodity markets and that's helped give prices a solid bump from very worrying levels.
The dividend is up as is the forecast farmgate milk price for next season. At $4.60 per kg of milksolids it looks a lot better than it did but is still well short of the $5.30 many farmers say they need to break even.
It's far from certain that the commodity rally will continue.
Perhaps, El Nino drought conditions, likely to constrict supply in the Southern Hemisphere, might give the company a lucky break.
It might be bad news for farmers in some regions but if it pushes the payout higher the wider co-operative will breathe a sigh of relief.
Meanwhile, the slump seems to have injected urgency into the company over the value added end of the business.
Whether that energy is enough to shake off the big questions being asked about corporate structure and governance remains to be seen.
We'll probably know in November - several dairy auctions from now - when chairman John Wilson faces re-election.
Liam Dann
Forecast boost 'not enough'
An average dairy farmer will get about $90,000 extra from Fonterra.
The increase in Fonterra's farmgate milk price forecast for 2015/16 will increase farm incomes by $1.35 billion, DairyNZ estimates.
But the farmer-funded industry group said farmers would still need more money to get through.
Fonterra increased its milk price forecast by 75c, from $3.85 a kg of milk solids to $4.60 a kg.
Dairy NZ said 60c of the increase would occur in the 2015-16 season ending next May, and 15c had been added to the retrospective payments to be paid between June and October next year.
The additional 60c would increase farm incomes by $90,000 to about $700,000 for an average farm producing 150,000 kg of milksolids.
"The increase is a relief to dairy farmers, particularly as it has been a difficult start to the season for many regions," DairyNZ said.
Dairy NZ estimated 70 per cent of farmers would still require extra cash to meet their core costs this season - down from 90 per cent when the milk price was $3.85 a kg of milksolids .
The break-even point for most is still estimated to be $5.30 a kg.
Dairy NZ estimated farmers would require an extra $100,000 over the season.
