Fonterra CEO Says Whole Milk Prices Too High, Need to Decline

Fonterra CEO Says Whole Milk Prices Too High, Need to Decline

Fonterra Cooperative Group Ltd. Chief Executive Officer Theo Spierings said milk powder prices are too high and risk hurting the dairy industry unless they normalize. “The distance between whole milk powder and the other milk products is too big,” Spierings said in an interview in Auckland today after Fonterra, the world’s largest dairy exporter, reported a 3 percent drop in earnings for the 2012-13 year. Higher prices not only push customers toward other milk products, they also make substitutes such as soy or vegetable oil more attractive, he said.Prices have soared after a drought in New Zealand this year curbed milk production amid strong demand in key markets such as China. Fonterra yesterday raised its forecast payout to farmer suppliers to a record NZ$8.30 ($6.84) a kilogram of milk solids for the current year. Spierings said that could rise further if prices hold up.

“A very high payout is nice for the farmers, it’s not nice for the consumers,” he said.

Fonterra buys milk to use in products from butter to baby formula, and can’t pass on all of the higher cost without reducing its competitiveness.

Spierings favors a milk price that yields “solid” earnings before interest and tax, which is “normally when whole milk powder is in a bracket of $3,500 to $4,000” a metric ton, he said. “Now we are at $5,200. It’s too high. If it stays for too long at a too-high level, it’s not good.”

China Demand

In regions like Africa, demand is already dropping off because of the affordability issue, “but China is so strong in buying whole milk powder, because there are issues of foot and mouth disease in the Chinese herd,” he said. “So I don’t know how long it’s going to take.”

China suspended imports of some Fonterra products in August after a contamination scare. While later testing revealed there were no health risks, bans on whey protein and base powders remain in place while safety assurance measures are improved. Those products represent 5 percent of Fonterra exports to China, said Spierings, who will visit the nation again next month as the company seeks to repair its reputation.

“Of course the situation is difficult, there’s a lot of angst and sometimes even anger,” he said. “On the consumer side there’s still a lot of work to be done, because the consumers are still not 100 percent sure what happened. There’s still confusion out there.”

China is New Zealand’s biggest dairy customer, buying NZ$3 billion worth of dairy products in the year through June.

Fonterra said earlier today that earnings before interest, tax and one-time items declined to NZ$1 billion in the year ended July 31 after the worst drought in almost 40 years drove up prices and squeezed margins. It warned yesterday that earnings in the first half of the current year will be “significantly lower” than a year earlier.

To contact the reporter on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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