High milk payouts squeeze Bonlac profits

Fonterra's big Victorian dairy operation, Bonlac Foods, faces major profit problems amid strong competition for milk across the Tasman.

Although Bonlac managed an almost 40 per cent jump in revenue to A$445.6 million in the six months to December 31, gross profits at the Melbourne-based business increased just over 3 per cent or A$1.28 million.

This slight increase, plus cost-cutting - and the absence of a big legal settlement that hit Bonlac's 2004 results - underpinned a 77 per cent rise in pre-tax profits to A$15.3 million.

But Bonlac warned that more than 80 per cent of this profit (A$12.87 million) was set to be wiped out by higher prices paid to milk suppliers in the highly competitive Australian market.

Senior Bonlac and Fonterra officials were unavailable for detailed comment on the results last night but a farming leader said the results meant the co-op's thousands of farmer shareholders would be keeping a particularly sharp eye on the Australian arm's future performance.

The half-year accounts are the last Bonlac will publish as a separate entity after Fonterra took full control of the Victorian dairy farmers' co-operative last August.

They show an A$127 million lift in revenue from continuing operations but the cost of sales rose A$146 million and by three percentage points as a proportion of revenue.

Gross profits were only marginally ahead at A$41.9 million compared with A$40.6 million in the same period in 2004.

Once other items - such as cost increases and savings, and the absence of the 2004 A$5.5 million legal settlement - are taken into account, the pre-tax profit rises by A$6.7 million to the A$15.3 million.

However, Bonlac in February announced a milk price increase for the season of A10c/kg of butterfat and A25c/kg of protein.

These increases - applied retrospectively to purchases and backdated to July 1 last year - were paid to suppliers in March this year.

Bonlac's report said the effect of these changes would not be brought to account until the second half.

"Management's estimate of the net impact of the increased milk price on the half-year result at December 31, 2005, is a reduction to profit of A$12.87 million."

Dairy Farmers of New Zealand chairman Frank Brenmuhl said yesterday the situation would be determined by how long Bonlac's main rival, Murray Goulburn Co-operative, could keep matching Bonlac's prices. Murray Goulburn is Australia's largest dairy exporter.

"If Murray Goulburn can't keep up the level of payments that it's making, there's no way Fonterra has to keep them up there either."

Brenmuhl also said Fonterra was paying a premium of about 15 per cent to new suppliers but this was not applicable after a year's worth of supply.

"So that should see the cost of new milk decreasing over time."

He understood Bonlac was not expected to contribute to New Zealand dairy farmers' payout until next year.

Dairy Farmers vice-chairman Lachlan McKenzie said Fonterra shareholders "will be patient in the short term but they won't be patient in the long term."

He said Fonterra would only have a couple of years to turn things round.