Fonterra continues to turn a corner in financial performance. Photo / Brendon O'Hagan
New boat and car dealers can forget high-fives over Fonterra’s hearty half year financial results - the dollar wins for farmers are a drop in the milk bucket compared to on-farm inflation.
Fonterra’s news this week that it doubled its interim dividend to 10c per share and proposed a 50c per share capital return totalling $800 million could give the impression its farmers will be spending up soon.
But with Statistics NZ’s primary producers’ index showing on-farm inflation at 16.5 per cent for 2022 – twice the level of the CPI over the past five years - that’d be overly optimistic, according to John Stevenson, chairman of the Fonterra Co-operative Council.
The organisation represents the interests of the 8000 Fonterra farmers who own New Zealand’s biggest business.
“It’s important to acknowledge farmers’ margins and balance sheets are as stretched as they have been for a long time due to on-farm costs and inflation. The 10c per share dividend is welcome news alongside that of the intended capital return ... but it’s important to put that (capital return) in context,” Stevenson said.
“It seems like a big number but that 50c is from the sale of Soprole (Fonterra’s Chile business). It’s not a performance-based return.”
He said some of the on-farm inflation, like labour costs, were embedded. What used to be a break-even milk price no longer applied.
Fonterra, announcing its financial results for the first six months of the 2023 year to January 31, said its forecast farmgate milk payment range would be $8.20-$8.80/kg milk solids.
“$6.50 per kg used to be a breakeven milk price, now it’s probably closer to $8/kg,” said Stevenson.
“It’s welcome but it’s not going-out-and-buying-a-new-boat material.”
Fonterra’s own calculations tend to back this up.
In response to Herald inquiries, the world’s sixth biggest dairy company by revenue said for an average milk production farmer with 150,000kg of milk solids covered by Fonterra shares, the value of the 10c per share dividend would be $15,000 per farmer.
Farmers who provide milk to Fonterra have to buy shares in the co-operative in line with their seasonal supply.
The total dividend to be paid out next month would be $160m, the company said.
In the 2022 financial year, the total value of Fonterra’s milk price to regional economies was $13.8 billion. Its value in the 2023 financial year was tracking to be $12.5b.
The proposed 50c per share capital return also applies to holders of Fonterra’s listed unit holders.
Fonterra on Thursday announced a 50 per cent increase in profit after tax to $546m for the first half of the 2023 financial year, compared to the corresponding period last year.
Revenue was $12.3b, compared to $10b in the previous period. The cost of goods sold, mainly the cost of milk in a buoyant market, was $10.2b, compared to $8.6b for the previous period.
Earnings per share were 33c, and the company upgraded its normalised earnings forecast for FY23 from 50-70c per share to 55-70c per share.
While consumer and foodservice earnings improved on strong prices for protein ingredients, higher input costs and ongoing pressure on margins hit Fonterra’s overall consumer business performance.
This resulted in the value of its domestic consumer business, Fonterra Brands NZ, being revised down by $92m, and that of its Asia consumer brands Anlene, Chesdale and Annum being marked down by $70m.
As a result, normalised ebit (earnings before tax and interest) for the overall consumer channel was down $177m to a loss of $94m.
This prompted Jarden head of research Arie Dekker to say in a market note that ongoing impairments in the consumer business beg the question on Fonterra’s long-term ownership of these businesses..
“We will be looking for Australia and other non-core businesses to be reviewed periodically for exit,” Dekker said.
Fonterra has exited its Brazil business and is completing the sale of Soprole. But after a review it decided to retain its Australian business.
The Fonterra farmer council’s Stevenson agreed the consumer business profit level was “not that flash” and farmers would always expect Fonterra to look hard at its portfolio, as it has done under the new business strategy.
“But in terms of some of the specifics we will be continuing to ask questions around the performance of some of the business units which do not perform.”
Stevenson said Fonterra had delivered other positives this year.
It had “stood up and supported farmers unable to keep supplying milk” after devastating weather events.
“There’s a positive story there in terms of belonging to a co-op, in particular in terms of cashflow. Farmers that had to stop milking or dry off early had their milk cheque covered until the end of the season (May 31). Farmers who had to dump milk had their losses covered by the co-op. You wouldn’t see that in other companies.”
Fonterra had also helped with emergency generators and many of its farmers had “picked up a shovel” and gone into the cyclone-ravaged East Coast and Hawke’s Bay to help recovery efforts.
Stevenson understood up to 30 farms in these regions had had to end milking early due to local bridges being destroyed.