Fonterra profits sour as Mengniu’s jump

Last updated: March 26, 2014 3:00 am

Fonterra profits sour as Mengniu’s jump

By Jamie Smyth in Canberra and Reuters

The diverging fortunes of Asia Pacific’s dairy groups came into the spotlight on Wednesday when New Zealand’s Fonterra reported a halving in first-half profits, while China Mengniu Dairy said 2013 profit jumped by a quarter year-on-year.

Fonterra, the world’s biggest milk supplier, reported a 53 per cent slump in interim profits in spite of a record-high global milk prices and surging demand, as the New Zealand co-operative struggled to contain costs amid a shortage of milk processing capacity.

Post-tax profit fell to NZ$217m (US$186m) in the six months to January 31, from NZ$459 in the comparable period a year earlier, the company said.

In contrast, Mengniu – China’s biggest dairy supplier – increased net profit by a quarter, from a restated Rmb1.3bn ($209m) in 2013 to Rmb1.63bn last year. The 2013 profit overshot a Thomson Reuters’ forecast of Rmb1.51bn.

Mengniu’s Hong Kong-listed shares rose 7.2 per cent to HK$38.1 in early trading.

Theo Spierings, Fonterra chief executive, blamed higher commodity prices and squeezed margins for his company’s drop in profits.

“We had to strike a balance between passing on rising costs immediately or continuing to build our market presence to secure long-term growth,” he said.

Under its co-operative structure Fonterra is obliged to buy milk from its farmer shareholders even when prices hit record levels – as they have over the past year due to surging demand from China.

Record milk production in New Zealand and a shortage in processing capacity have compounded the difficulties faced by the company, resulting in a squeeze on profits.

Mengniu, on the other hand, said it has benefited from closer government scrutiny of China’s dairy industry to boost consumer confidence, and efforts by Beijing to promote consolidation in a fragmented sector.

The government has set higher entry barriers and investigated monopoly practices on imported milk formula products as it relaxed the country’s one-child-per-family policy, the company said.

“In light of the determination of the Chinese government to restore consumers’ confidence in domestic dairy products, we envisage wider policies to further regulate the domestic dairy product market,” said Sun Yiping, chief executive

Fonterra, which controls a third of global dairy supplies, earns the best returns by shipping milk powder to China where it can be used in high-value infant formula. But it does not have enough milk powder processing plants to cope with the high milk volumes that farmers are producing.

Mr Spierings said the company was accelerating the construction of new processing plants, which would result in additional capital expenditure of $400m-$500m over the next three to four years.

Fonterra’s underlying earnings before interest and taxes fell to NZ$403m, from NZ$693m in the corresponding period a year earlier. Revenues jumped 21 per cent to NZ$11.2bn over the same period.

The increase in demand for milk, which has been nicknamed “white gold” in New Zealand due to its importance to the economy, benefited Fonterra’s 10,000 farmer shareholders, for whom farmgate prices for milk increased to $8.65 per kilogramme of milk solids, from $6.16.

The company cut its interim dividend to 5 New Zealand cents per share from 16 cents a year ago. It said it expected a full-year payout of 10 cents per share, down from 32 cents per share last time.

Fonterra is still recovering from a botulism false alarm and resulting product recall last year that put off consumers in China. French food group Danone terminated its contract with Fonterra as a result and has begun legal action against the company.

In an interview this week, Bill English, New Zealand’s deputy prime minister, told the Financial Times that his country has since made a “sustained effort” to reassure consumers everywhere, including in China, that its dairy products are safe.