27 Sep 2012

Fonterra looks to cut costs as farmers face lower payout

8:48 am on 27 September 2012

Fonterra plans to cut operating costs by $90 million as it tackles difficult trading and farmers face another year of lower payouts.

The diary cooperative on Wednesday announced it will pay its 10,500 farmers $6.40 a kilogram of milk solids for the year ending in July, a drop of 19% compared with the previous year.

The company says demand for dairy remains strong, but record high global production and a persistently high New Zealand dollar have affected earnings.

Fonterra's profit fell 19% to $624 million, mainly due to more than $200 million in tax credits in the previous year, while sales remained flat at $19.8 billion.

Chief executive Theo Spierings says farmers are hurting from the lower milk prices and their payout for next year is forecast to fall further to $5.25 per kilogram of milk solids.

He says the company needs to respond by cutting overheads in areas like travel and entertainment, conferences and management and consulting fees.

Mr Spierings says if farmers receive a lower milk price then they have to cut costs and Fonterra should be doing the same.

Shorter term fixed price contracts have driven prices higher for customers outside the Global Dairy Trade index, boosting NZ Milk Products' normalised earnings by 23% to $515 million. But the Australia-New Zealand business recorded a 20% decline in earnings to $204 million.

Theo Spierings says Australia is under pressure after losing market share. He says Fonterra needs to return to volume growth in Australia and may need fewer brands with more intensive marketing, and costs need to be in line with where the market is.

Mr Spierings says in New Zealand milk prices have dropped after consumer pressure which means that volume is now growing again - and more volume means more sales to cover costs.

High dollar costly for farmers

The high New Zealand dollar is estimated to have cost farmer shareholders $1 billion in lost revenue.

Theo Spierings says he has no plans to put pressure on the Government over changing monetary policy to tackle the Kiwi, but the issue needs to be addressed.

Mr Spierings says it is not so much the strength of the New Zealand dollar, but the weakness of the US dollar and it is not likely the American economy is going to improve quickly.

Big payout for Ferrier

Fonterra chairman Sir Henry van der Heyden confirmed Fonterra paid $8.2 million to former chief executive Andrew Ferrier when he left in 2011.

Sir Henry says the payment was very much based on performance, but Fonterra expects to get questions about that when it has a round of farmer meetings in October.

Speaking at his last results announcement before retiring, Sir Henry said plans to launch Trading Amongst Farmers in November are on track.

The company cannot update its earnings forecast until it releases its prospectus near the end of October.