KEY POINTS:
Fonterra's stronger focus on its brands business has helped it to more than double the value-added part of its final payout.
The value-added component, which relates to the products and specialty ingredients Fonterra makes with raw milk products, has risen to 59c from 25c the previous season -
an increase of 136 per cent.
In its annual result, the co-operative said higher sales volumes and changes in product mix and pricing helped Fonterra Brands' revenue grow 5.4 per cent to $4 billion, despite a surge in raw commodity prices.
The improved performance of the firm's brands, which include Anlene, Fernleaf, Tip Top and Anchor, will please Fonterra, which has always aimed to be more than a company that just sells raw milk commodities.
But Fonterra and dairy farmers stress the one-off nature of the value-added spike, warning that returns from those businesses are under enormous pressure in the current season.
That rise means profit achieved above the milk commodity price contributes $728 million to a total payout of $5.6 billion, up $428 million on the previous season's $300 million.
Fonterra has increased its overall payout from a forecast $4.35 per kg of milksolids to $4.46.
In announcing the final result, which will inject $5.6 billion into the economy, the co-operative pointed to the pickup in the brands business, a substantial increase in sales volumes by Fonterra's speciality ingredients arm and lower overall costs as important factors in the upward revision.
Chief executive Andrew Ferrier said the boost in the value-added component reflected the benefits of ongoing business improvements implemented over the past several years, including a stronger focus on the brands division, investments in Fonterra's supply chain, increases in manufacturing efficiency and lower energy consumption.
Ferrier said Brands had performed well as its margins came under pressure towards the end of the season with higher commodity prices.
But chairman Henry van der Heyden emphasised that conditions looked difficult in the current season.
"[The value-added component of last season's payout is] a big step up from the last year - all parts of that business, including the brands business. But as we move into this year we are going into a period of much higher commodity prices.
"Our margins are under enormous pressure."
Shamubeel Eaqub, economist at Goldman Sachs JB Were - which predicted May's forecast of $4.35 - praised the performance of Fonterra Brands in the past year, but said because many buyers of Fonterra's consumer brands lived in the developing world, their ability to keep buying product could be affected by soaring prices. "With the value-added side it's obviously going to be tough when your input prices are going up - it may be difficult to pass on some of those cost increases into prices."
While he had not noticed a change in demand as a result of the higher prices, Eaqub said it was a risk Fonterra would have to manage.
Dairy Farmers of New Zealand chairman Frank Brenmuhl said the company's consumer brands were not looking too bad given the fact it was always a lot more difficult to do well when commodity prices were high.
"[But] for next year the profits are anticipated to be well down."
BETTER VALUE
* A 5.4 per cent rise in Fonterra Brands' operating revenue has helped to boost the value-added component of Fonterra's payout by 136 per cent to 59c.
* Chief executive Andrew Ferrier puts that boost down to a stronger focus on the company's consumer brands - which include Anlene, Fernleaf, Tip Top and Anchor.
* But chairman Henry van der Heyden says the surge in commodity prices in the current season puts enormous pressure on the margins of the company's value-added businesses including brands.
