Fonterra cuts milk payout

High milk prices drove Fonterra's earnings sharply lower for the financial year to July while the current year's sharp drop in prices has forced the cooperative dairy giant to lower its payout forecast.

Fonterra said its "normalised" earnings before interest and tax came to $503 million for the year to July, down 50 per cent on the previous year's, as high milk prices put pressure on the cooperative's profit margins.

The higher cost of goods sold, along with higher interest and taxation, saw Fonterra's net profit after tax fall by 76 per cent to $179 million.

High milk prices, while a boon for farmers, are an added cost to some of Fonterra's manufacturing, and dividend-paying, operations.

"Constrained margins in our foodservice and consumer businesses and on non-milk powder products were the knock-on effect, contributing to a 27 per cent rise to $19.8 billion in the cost of goods sold," chief executive Theo Spierings said in a statement.

Fonterra said it had revised its forecast farmgate milk price for 2014/15 to $5.30 a kg of milk solids from a previous forecast of $6.00 a kg but increased and widened its dividend forecast to 25c to 35 c from 20c to 25c.

Chairman John Wilson said the lower forecast farmgate milk price reflected continuing volatility, with the GlobalDairyTrade price index declining 6 per cent in the past two trading events.

See the recent fall in world dairy prices here:

"The market is currently influenced by strong milk production globally, the impact of Russia's ban on the importation of dairy products, and the levels of inventory in China," he said.

"Some relief has been provided by exchange rates, with the NZ dollar recently showing some signs of falling against the US dollar," Wilson said.

"Under the current market conditions, there is further downside risk. However, the forecast reflects expectations that prices will increase in the medium term," he said.

Spierings said 2014 was a tough but defining year.

"We focused on building volumes and value in our key markets, especially Asia and Latin America," Spierings said in a statement.

See Fonterra's annual financial results presentation here:

In Asia, Fonterra saw volume growth of 12 per cent, primarily driven by China. In Latin America, Fonterra's Soprole business' focus on new product development and innovation contributed to the region's three per cent volume growth.

"However, our New Zealand and Australian businesses had a challenging year due to much higher input costs and competitive pressure that constrained our ability to pass these on," he added.

These businesses were now on a firmer footing to lift their performance in the current financial year, Spierings said.

He said progress was being made in securing the securing the necessary regulatory approvals and proceeding with the partial tender for a shareholding of up to 20 per cent in China's Beingmate.

Looking ahead, Wilson said that while the fundamentals for dairy remained strong, the revised forecast reflected current high levels of volatility.

"The forecast reflects an uncertain outlook for the global economic environment and an expectation of continued volatility for dairy prices driven by geopolitical events and the supply/demand imbalance," he said.

Fonterra confirmed a final cash payout of $8.50 for the 2014 year, comprising a farmgate milk Price of $8.40 per kg of milksolids and a 10c dividend, implying a drop in revenues for the dairy sector of around $5.4 billion.

Beyond the current season, ASB Bank said its long-term positive view for dairy prices still holds. "We expect global dairy production growth to moderate and for Chinese demand to rebound heading into 2015," the bank said. A lower NZ dollar over 2015 and 2016 should also be supportive of the milk price.

"Following on from our $5.30/kg milk price for 2014/15, we expect a lift to $6.50/kg in 2015/16, and a further lift to $7.00/kg on average over the long run," ASB said.

Markets reacted to the news of lower 2014/15 payout forecast by sending the NZD/USD around 30 pips lower immediately.

See the Fonterra Forecast Milk Price and Dividend announcement here: