Q&A: Why is Fonterra cutting jobs?

Fonterra chief executive Theo Spierings in March. He said the news was unsettling for staff. Photo / Getty Images

Why is Fonterra cutting jobs?

The job cuts are part of a major review taking place across the entire business. The 523 redundancies are expected to reduce the firm's annual wage bill by up to $60 million.

Chief executive Theo Spierings said yesterday that the co-operative needed to remain competitive.

Fonterra also needs to be seen to be making changes as its farmer shareholders struggle with falling dairy prices.

There have been anecdotal reports that many of its shareholders are seeking to leave and supply independents.

Why are farmer's facing tough times?

Dairy prices have been in freefall, most recently plunging an average 10.7 per cent to a six-year low in the GlobalDairyTrade auction on Wednesday night.

Wholemilk powder prices, which are central to Fonterra's farmgate milk forecasts, fell 13.1 per cent to US$1848 a tonne. Wholemilk powder was selling for $5245 a tonne in April 2013.

Fonterra's 10,500 shareholder farmers will collectively earn as much as $9 billion less this year than they did in the at the peak of the commodity cycle.

Fonterra is forecasting $5.25 a kg farmgate milk price for the current year, up from $4.40 a kg for in the 2014/15 season. However, the ongoing decline in whole milk powder prices could put pressure on that forecast.

Why are dairy prices falling?

High levels of milk production in New Zealand, Europe and the United States have contributed to the drop. Meanwhile, weak demand in China and an import ban in Russia is also having an impact.

What has Fonterra's financial performance been like?

Not great. Fonterra's half-year net profit was $183 million, down 16 per cent on the same period a year earlier and well below market and farmer expectations. The company also lowered its dividend forecast to a range of 20-30c per share from 25c-35c previously.

Units the the NZX-listed Fonterra Shareholders' Fund, which provides investors with access to the cooperative's dividend stream, have lost 41 per cent of their value since May 2013.

What is Fonterra doing to improve its performance?

The company wants to increase its exports of value-added products to major export markets, such as China.

That would reduce the company's exposure to volatile commodity prices. Moves in this area include the company's partnership with Chinese dairy firm Beingmate Baby & Child, which provides a major distribution deal for Fonterra's Anmum infant formula brand.

The company also wants to create more marketing roles so it can sell its products better into overseas markets, where it faces increasing competition from rivals.