Price dip hits dairy revenue growth

By PHILIPPA STEVENSON and NZPA

Lower commodity prices over the past year left the Dairy Board lagging behind the industry target of 15 per cent revenue growth despite shipping a record 1.4 million tonnes of product.

The board's revenue grew only between 3 and 4 per cent, from $7.421 billion last year to $7.651 billion in the year to May 31.

At the release of the board's annual report, chief executive Warren Larsen said the sole export dairy marketer was on target with the other two goals agreed by industry - a 4 per cent productivity gain and a better than 15 per cent return on the board's gross assets.

It was closing on the third goal as its newly formed strategic business units, New Zealand Milk and NZMP, came up to speed.

Mr Larsen said staff had pushed sales up by 6 per cent, or 75,000 tonnes of product. Most important, the board had added $100 million in cash value for shareholders.

Return on assets employed, 19.5 per cent (17.4 per cent the previous year), was significantly higher than the 11 per cent weighted average cost of capital, which was why the board had been able to add cash value.

"We think that is a pretty good effort," Mr Larsen said.

The board had also added value by continuing to increase the spread between commodity milk price and its combined payout and retentions this year with a payout of 335 c/kg milksolids, compared with a commodity milk price of 298 c/kg.

Mr Larsen said the ingredients business NZMP had produced "relatively steady growth," up to $4.5 billion from $4.4 billion last year, from record sales of 1.1 million tonnes of product, up 6 per cent in volume on last year.

Earnings before interest and tax rose by 26 per cent to $334 million.

But the report showed NZMP's record sales were caught up in fluctuating world markets.

All the base dairy commodities fell in price, in US dollar terms, in the first half of the year. Mr Larsen said cheese dipped, to be particularly low around August-September last year, then flattened out, while wholemilk powder fell in the most important selling months.

Butter slumped through the year, a serious issue for the industry, which had to work hard to get rid of its last 50,000 to 60,000 tonnes of butter each year.

But most of the other commodity prices bounced back later in the year, with prices for milk powder and casein reinforced by cutbacks in European export subsidies and strong demand.

"We had a buoyant US economy ... without that, life would have been much more difficult," Mr Larsen said. There had also been a partial recovery in key Asian economies.

The board had battled a fall in the euro, which made European Union dairy products more competitive in some markets. In addition, problems in the British retail sector hurt New Zealand's butter business in the UK.

Mr Larsen said specialty products were the most profitable part of NZMP's performance, and lifted by 40 per cent to $520 million, while sales to China surged 70 per cent to $270 million.

Despite trade barriers, a continued strong performance in the US had lifted sales by 14,000 tonnes, or $75 million.

NZMP was still on track to double sales revenue in the five years from 1998-99, which was what the industry strategy demanded of it.

The revenue of consumer business New Zealand Milk was $2.99 billion ($2.84 billion last year), a lift of $161 million, including an extra $93 million from South-east Asia.

In the year ahead, the board was emphasising its leadership in "nutritional" milks, particularly in Asia and Latin America.

"We're flat out implementing the strategy, the currency and pricing trends are favourable, and we're heavily involved in developing partnerships and trying to acquire other businesses," Mr Larsen said.