Soaring milk prices push Open Country into the red

Open Country's Wanganui milk powder plant. Photo / Wanganui Chronicle

Olam International Ltd, the food commodities group aiming to expand its global reach, says high milk prices in New Zealand have wiped out profits at its 25 per cent-owned Open Country Dairy and it may consider exiting the investment.

The Singapore-based commodities group made the comments at the release of its third-quarter earnings yesterday, which soared 43 per cent as sales jumped. Chief Executive Officer Sunny Verghese told the briefing that Olam "will want to exit" Open Country if a government inquiry into milk prices doesn't result in reductions.

Open Country Dairy will probably post a full-year loss as a result of having to pay more for its raw material - milk, he said.

The investment "underperformed during the period on account of the surprisingly high milk price announced by Fonterra in February for the FY2011 season, which led to poor performance for most dairy processors during this period," the company said in a statement lodged with the Singapore Stock Exchange.

Auckland-based Fonterra procures milk from farmers for re- sale to processors including Open Country, which makes cheeses, fats, and powdered milk. A "surprisingly high" price announced by Fonterra for 2011 has eroded the profits of dairy-processing companies, Olam said.

Fonterra responded this afternoon, saying Olam should look more closely at the management of Open Country Dairy.

"Fonterra has made a profit from that milk price and if OCD has not managed to do so selling commodities then they should either look at their cost structure, their foreign exchange hedging or the sales prices achieved for their product," said Gary Romano, managing director of trade and operations.

The fortunes of Open Country Dairy contrast with those of the parent, which posted a 43 per cent increase in third-quarter profit today. Net income in the three months ended March 31 was S$127.3 million ($103 million), Singapore-based Olam said today in a statement. Revenue surged 75 per cent to S$4.74 billion on a 24 per cent jump in commodity sales volumes.

Olam said its dairy business also had to contend with the "consolidation of operating losses" from New Zealand Farming Systems Uruguay Ltd., which it took control of last year. Olam owns 78 per cent of the company and is offering 70 cents a share for the remaining 22 per cent.

"Upon assuming control of NZFSU, Olam had taken significant steps to reshape strategy and revamp the management of the company," it said. "Olam expects these efforts to start producing more positive results over the next few years."

In February, Farming Systems said it may not turn a profit for two years and wants to raise US$110 million to develop its business and repay Olam a US$50 million loan.