And it has signalled increasing milk supply from New Zealand farmers is a priority so it is providing more flexibility for farmers to increase production or become dairy farmers.
It also plans to speed up the introduction of more plants producing high-earning milk powders, spending up to $500 million in the next three or four years.
It has predicted a 10c dividend to shareholders and confirmed an interim payment of 5c/share dated April 10.
The co-op’s revenue from sales was up 21% to $11.3 billion for the six months to January 31, the first half of its financial year, with profit of $217m, giving earnings per share of 13c.
Chairman John Wilson said Fonterra was on track to deliver the highest-ever returns to farmer shareholders and the NZ economy.
“A forecast cash payout of $8.75 represents a $13.8b injection into the NZ economy. An estimated 50c in every $1 of payout is spent by our farmers locally, meaning the benefits will be felt in urban as well as rural communities,” Wilson said.
“Our current season forecast reflects sustained strong milk powder prices which, on average, are ahead by US$1200 per tonne compared to last season,” Wilson said.
“The first half has been exceptional for the co-operative as a result of high volatility driven by record demand for milk powders resulting in a 21% increase in revenue,” chief executive Theo Spierings said.
“The season saw record milk volumes collected across the October-November peak period and milk volumes collected for the season to date increased by 4% on the prior year to 1120m kg MS.
“We processed as much of this milk into the higher returning milk powder product streams as we could,” he said.
However, its plant configuration meant about 25% had to be processed into cheese, casein and other products that made a loss, Spierings said.
That meant the milk price forecast was 70c/kg MS less than that calculated using the Farmgate Milk Price Manual.
“The past six months has been a period of mixed fortunes for the co-operative.
“Volatility is a fact of life in dairy.
“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.
“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.
“Taking the longer term view has constrained profitability during this run of strong commodity pricing but we are positioning ourselves for the future with consumer and food service volumes in key strategic markets like Asia, up 10%, excluding Sri Lanka which was affected by the temporary suspension of operations in August 2013.
“Being disciplined with operating expenses, which were flat for the period, contributed to our ability to offset some of the rising input costs,” he said.
Fonterra’s business strategy written in 2012 predicted growing demand for dairy products in emerging market and that demand would outstrip supply growth and in the past six months those trends had moved faster than expected.
Fonterra now had five priorities to:
- Optimise global ingredients sales and plant configuration;
- Grow significantly in everyday nutrition;
- Continue food service growth momentum;
- Capture high margins in advanced nutrition and;
- Enable growth by expanding beyond NZ to selectively invest in milk pools, matching demand with the best market opportunities.
“We need to ensure our farmers can confidently grow supply.
“We are in a competitive market for milk so retaining and growing our NZ supply is always a priority.
“Returning the highest Farmgate Milk Price is crucial as good returns enable our farmer shareholders to cover their rising costs and to invest in their farms and futures.
“To support onfarm growth we are successfully offering more flexible supply contracts which offer staged payment options for shares.
“We have also provided more financial flexibility for farmer shareholders by piloting a guaranteed milk price scheme, enabling them to lock in the price paid for a percentage of their milk.
“We will continue looking at new ways of providing financial flexibility over the course of this year.
“Delivering the highest shareholder returns means making the products which earn the best returns over time.
“Since our inception in 2001, we have consistently invested in growing the capacity that counts, especially in milk powders. We will continue down this path but at a faster pace, ensuring assets come on stream ahead of expected increases in milk production.
It would bring forward planned capital investments to provide:
- Greater flexibility to take advantage of relative market prices;
- Extra capacity for milk powders production to reduce forced making of lower returning products and;
- The ability to take higher volumes from existing suppliers and new volume from joining suppliers.
“This will result in additional capital expenditure of $400-$500m over the next three to four years.
“Even with fast-tracked investments, adding capacity will take time so we also have a programme in place to increase throughput in existing plant during the 2015 financial period,” Spierings said.
“Milk sourced in NZ will always be our top priority but it is also important we maintain our global view of both manufacturing and milk supply to ensure a win-win for Fonterra and our farmer shareholders.”
The outlook for dairy products remained strong and while Fonterra had plans to profit from the continued rise in global demand, dairy commodity prices remained volatile, he said.
