Fonterra profit slumps 53pc as high commodity prices bite

Fonterra's recall may raise eyebrows overseas but should ultimately nurture trust in the company's products. Photo / Getty Images

Fonterra has posted a 53 per cent drop in interim net profit as high dairy commodity prices and processing constraints hit the dairy co-op's margins.

Net profit for the six months to January 31 was $217 million, down from $459 million a year earlier, the company said.

Fonterra said total revenue for the six month period rose 21 per cent to $11.3 billion, while normalised earnings before interest and tax (ebit) fell 41 per cent to $403 million.

The interim result covers the period of Fonterra's botulism false alarm in August, which resulted in a global recall of dairy products, mostly infant formula.

While high dairy prices are a boon for farmers, the cooperative's earnings are negatively impacted because it has to purchase the milk at the higher rates before processing it into consumer products like milk powder.

Strong milk production means Fonterra is also facing capacity constraints in its milk powder processing facilities.

"We processed as much of this milk into the higher returning milk powder product streams as we could," said chief executive Theo Spierings. "However, our current asset footprint meant that around 25 per cent had to be processed into cheese, casein and other non-reference commodity products which earned negative returns over the period."

Spierings said volatility was "a fact of life" in the dairy industry.

"We are very focused on delivering a consistently strong farmgate milk price, as well as stable and growing earnings over the medium to long term," he said. "Higher dairy commodity prices have put increasing pressure on margins in our consumer and food service businesses. We had to strike a balance between passing on rising costs immediately or continuing to build our market presence to secure long term growth."

Fonterra reiterated its record forecast cash pay-out of $8.75.

See Fonterra's market briefing presentation here:

See Fonterra's media presentation here: