Hurt by the worsening slump in global dairy prices, New Zealand’s Fonterra Co-Operative Group Ltd. said it would shed 523 jobs—or 3% of its workforce—in an attempt to shore up profit.
In a statement following the decision, Fonterra’s chief executive, Theo Spierings, said the farmers’ cooperative needed to change if it wants to remain competitive in the global dairy market. Fonterra is the world’s biggest dairy exporter, employing more than 18,000 people in 40 countries.
Further job cuts are possible, the group said, adding that the latest moves would save between 55 million New Zealand dollars (US$35.9 million) and NZ$60 million a year, with a one-off restructuring cost of NZ$12 million to NZ$15 million.
Fonterra began a review of its business in December, after concluding that the global dairy market wasn’t on a path to a swift recovery, but never foresaw the extent of the current downturn. Milk prices slumped 11% in the overnight GlobalDairyTrade auction, having more than halved over the past year alongside China’s slowdown, and are now at their lowest level since 2002.
The GlobalDairyTrade online auction is widely seen as providing a market reference price for global dairy products. Whole-milk powder prices, the largest traded dairy product on the exchange and Fonterra’s main export, fell by 13% overnight.
Milk prices turned soured last year as strong global production, high dairy stocks in China and a Russian ban on U.S. and European dairy imports resulted in a supply glut.
Dairy prices are closely linked to New Zealand’s economy. The Reserve Bank of New Zealand has previously cited the struggling dairy sector as a major risk to the country’s financial stability, as about 25% of farmers have negative cash flow for the current season, it said. Most of the country’s milk is also exported, making its dairy sector highly susceptible to changes in external supply and demand.
“If you thought dairy prices were ugly before, they are horrendous now,” said Doug Steel, an agricultural economist at Bank of New Zealand.
Baby-formula maker Mead Johnson Co. just slashed its full-year outlook, citing low sales and highlighting slowing growth in China and emerging markets.
Soft prices and slow demand do not bode well for Fonterra’s 10,500 farmer shareholders. In March, the group reported a 14% drop in first-half revenue from a year earlier and said it would cut its dividend. The payout for the coming season, beginning June 1, is forecast to be NZ$5.25—below dairy farmers’ average break-even price, according to John Janssen, BNZ’S head of agribusiness.
Most analysts expect the payout to be considerably lower than that, with Australia New Zealand Bank predicting between NZ$3.75 and NZ$4.00. Westpac Banking Corp. puts the figure at NZ$4.30.
Some farmers have been critical of Fonterra itself, calling on the cooperative to invest less offshore and more in helping its own members weather the current volatility.
By Lucy Craymer