Fonterra result puts farmers under pressure
Fonterra's flat annual result for 2012 holds no surprises for the New Zealand economy given the impact of a global milk tsunami which drenched international commodity prices, but confirms a squeeze on cashflows for dairy farmers, says an economist.
BNZ economist Doug Steel said from a macro-economic perspective, there is "very little" in the dairy giant's announcement of flat revenues of $19.8 billion and a 19 per cent dip in net profit after tax.
Final payout of $6.40 for a fully shared up farmer is 19 per cent down on last year's payout.
Steel said the fall in payout was confirmation of a predicted tightening up in farmer cashflows this year and meant around $1.6 billion for the dairy industry overall.
The impact of a global milk glut on Fonterra's returns in the 2012 should not be under-estimated, he said.
"The result absolutely reeks of a massive increase in volumes and the global impact on dairy prices. There is a clear difference between milk volumes (produced) and what price Fonterra gets for product."
When retained earnings are factored in, the payout meant a 12.5 per cent reduction in payout for farmers in the 2012 year, Steel said.
The payout was "smack in the middle" of Fonterra's previous guidance and, for the markets, the overall results is "as you were", he said.
Chairman Sir Henry van der Heyden said while global dairy demand had held up reasonably well during the milk production flood, the "ocean of milk" impacted on international commodity prices. Fonterra's online auction platform GlobalDairyTrade index had recorded its lowest value in 34 months in May, he said.
"This contributed to a lower farmgate milk price in the 2012 year, however the impact of this decline on overall earnings for farmers has been eased a little by the much higher volumes of milk they produced."
Net profit after tax was $624.7 million, down 19.1 per cent on last year.
Milk flows for the year were up 11 per cent, nudging 1.5 billion kgs milksolids.
The farmer-owned cooperative also posted an 11 per cent increase in export volumes to 2.32 million tonnes.
Sales volumes increased just 2 per cent to nearly 4 million metric tonnes.
Cashflows were up $206 million at $1.4 billion.
The result includes a lower farmgate milk price of $6.08/kg milksolids, down from $7.60 last year, reflecting lower commodity prices and the strong Kiwi dollar.
Directors announced a dividend of 32c per share, with retained earnings of 10c per share.
Fonterra chief executive Theo Spierings said the cooperative, New Zealand's biggest company, had posted a strong operating performance, with normalised earnings of NZ$1.3 billion for the year, up 2 per cent on last year.
Profit before tax was up 9 per cent on the previous year and net profit after tax down 19 per cent, largely due to tax credits of $202 million the previous year not repeated in the 2012 period, Spierings said.
Excluding those credits, net profit after tax improved by 10 per cent.
The company continued to strengthen its balance sheet with its economic gearing ratio improving from 41.8 per cent to 39.1 per cent.
Fonterra's business units had a mixed year.
NZ Milk Products, the commodities manufacturing division, recorded a 23 per cent increase in normalised earnings to $515m. Revenue improved by 1 per cent to $15.7b for the year and the division saw a 7 per cent rise in sales volumes.
The Australia-New Zealand business (ANZ) had a difficult year with a 20 per cent dip in normalised earnings to $204m.
Normalised earnings were up slightly in New Zealand but the trading environment in Australia remained challenging with a continuing downturn in consumer spending and aggressive competition, Spierings said.
The Asia/Africa/Middle East business recorded a 1 per cent lift in normalised earnings to $194m.
Latin America's normalised earnings increased by 16 per cent on a constant currency basis. Sales volumes were up 2 per cent, with growth in milk powder and beverage sales.
Spierings said the company was targeting a $90m decrease in operating expenses, aiming to deliver $60m of this in the 2013 financial year.
Fonterra was not updating its earning forecast in the "blackout" period leading to the release of its prospectus for share Trading Among Farmers, he said.
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