Fonterra to pay farmers $5.1b

By LIAM DANN

Fonterra will inject almost $1 billion more into the economy this year thanks to soaring international milk powder prices.

Its annual result yesterday showed Fonterra will pay farmers a total of $5.1 billion - up $969 million on last season.

The dairy co-op added an additional 2c per kg of milksolids to its final farmer payout - taking it to $4.25.

Fonterra's net profit for the year was just $16 million, compared with $284 million last year.

But chairman Henry van der Heyden emphasised that as a co-operative Fonterra's brief was to return value to shareholders rather than make profits.

Last season's profit had been based on one-off gains from business sales.This year, the board decided not to retain any significant profits.

The result has again highlighted the importance of raw commodities to the national economy.

Fonterra overcame rising exchange rate costs and a relatively poor performance by its consumer business (New Zealand Milk) to produce the strong result.

Van der Heyden said high commodity prices were the fundamental reason for the good payout. In US dollar terms, commodity prices were up 30 per cent for the year.

Production volumes and total sales also rose for the ingredients business.

But the high kiwi dollar cost Fonterra an extra $540 million last year.

Worryingly, that additional cost was despite Fonterra being hedged at an average of US52c for the year.

The worst effects of the exchange rate - which has gone as high as US71c this year - are still to be absorbed by the co-operative.

Fonterra has warned that the dollar's rise could cut payouts significantly in the next two seasons.

Westpac economist Richard Sullivan said for that reason, rural towns were unlikely to experience a retail boom based on the good payout. Farmers were aware the good times could soon be over and would plan accordingly.

Because Fonterra is hedged 15 months in advance, farmers may not feel the worst currency effects until the 2006 season.

By that time, commodity prices may also have fallen.

Fonterra will at least head into the tough exchange rate environment with a strong balance sheet.

Debt is down from $4.4 billion to $4 billion.

New Zealand Milk also dragged total revenue down this year.

Chief executive Andrew Ferrier said that ironically, when prices for raw ingredients such as milk powder were good, trading conditions for NZ Milk were tough.

NZ Milk's total revenue was down by $945 million to $3.4 billion, most of which could be attributed to the sale of businesses in Britain and South America into joint ventures.

The remaining drop of $225 million was largely due to currency movement. Ferrier said the real story for NZ Milk was flat revenue, although sales were up slightly.

NZ Milk profits were pulled down because of the time lag between the rising cost of ingredients and the ability of the company to raise prices in supermarkets. Profits were also hit by the downward revaluation of brand values in some markets.

Ferrier said there had been specific problems with Mexican cheese brands, but a new management team was now in place there.

But Fonterra's strongest international brand, Anchor, was doing well and had improved in value.

Despite the disappointing result for NZ Milk, Fonterra achieved 7 per cent growth in value-added product sales in both business segments. Performance was aided by strong demand for high-tech specialist milk powder products.

Van der Heyden said Fonterra had achieved its target of $310 million of merger-related cost savings five months earlier than planned.

"We're proud of the year we've just had."