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NZ’s Fonterra cuts forecast milk payout, eyes ice cream business sale

December 6, 2018
Consumer Packaged Goods

Dairy giant Fonterra Co-Operative Group Limited downgraded its forecast milk payment to farmers and said it was looking to sell its ice cream business, as the New Zealand-based firm reels from its first ever financial loss.

The Auckland-headquartered company said in a statement on Thursday that due to lower global dairy prices it had reduced its 2018-2019 forecast farmgate milk payment to farmers to between NZ$6.00 to NZ$6.30 per kilogram of milk solids. That was down from a range of NZ$6.25 to NZ$6.50 set in October.

The revision underscored the dairy firm’s vulnerability to global commodity price gyrations, even as it made a concerted effort to move more of its production into value-added branded products.

Three months earlier the company announced its first ever annual financial loss, in part due to higher milk prices the previous year, which had shrunk its profit margins on its value-added products, such as branded cheese and yoghurt.

Analysts said that Fonterra was still under-estimating the likely dent to global dairy prices from increased supply in coming months.

“We note the risks to Fonterra’s forecast are clearly tilted to the downside,” said Nathan Penny, senior rural economist at ASB Bank, adding that its forecast range was around NZ$5.85 to NZ$6.15.74

The 2018 financial year loss had prompted Fonterra to undertake a review of its assets, which the company said on Thursday could lead to the sale of New Zealand icecream brand Tip Top.

Fonterra said it has appointed investment bank FNZC as an external adviser to consider ownership options for Tip Top, which it said has reached maturity and “will require a level of investment beyond what we are willing to make”.

Despite Tip Top’s local popularity, Fonterra needed to free itself up to focus on selling branded products in bigger Asian markets where it is trying to capture demand for protein from the fast-growing middle class, according to analysts.

“They can’t take it any further. It is logical to some extent…given the size of the company, and given the size of our dairy industry, they have to really focus on global markets,” said Brian Gaynor, head of Auckland fund manager Milford Asset Management.

Fonterra also said it would regain full ownership of its Darnum plant in Australia by Dec. 31, having on Wednesday agreed to shut down the Darnum joint venture with Chinese infant formula group Beingmate Baby & Child Food Co Ltd (002570.SZ).

In 2015, Fonterra and Beingmate entered a joint venture to buy the Darnum plant, giving Fonterra a 49 percent stake.

Since that time, Beingmate has struggled with widening net losses due to rising marketing costs, forcing Fonterra to this year announce a NZ$405 million ($278.60 million) writedown on its 18.8 percent stake in the Chinese firm.

Fonterra said it would enter into a multi-year agreement to supply ingredients to Beingmate from the plant.

Shares in Fonterra’s traded fund were largely flat on Thursday at around NZ$4.70.

($1 = 1.4537 New Zealand dollars)

By Charlotte Greenfield and Nikhil Subba

Source: Reuters


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