24 Dec 2013

Fonterra faces decisions on capacity

1:55 pm on 24 December 2013

New Zealand's largest company is facing some tough decisions on whether it should further increase its capacity to produce milk powder.

Dairy giant Fonterra was forced in December to cut its dividend to 10 cents per share from the 32 cents it forecast in September because it had reached full capacity at its milk powder plants.

The excess milk it received was made into other products, such as cheese and casein, but because global powder prices were so high, it was producing these products at a loss.

Fonterra is already adding new powder capacity, notably the world's largest milk powder plant at Darfield in Canterbury which can process 2.2 million litres of milk a day.

It is also extending its Pahiatua plant, which is scheduled to start producing in September 2015.

Craigs Investment Partners analyst Arie Dekker said one of the things Fonterra could do to avoid making loss-making products would be to build surplus capacity into the system, giving the company more flexibility.

"So that next time powder prices are so elevated and some of those other products are returning less, they have the ability in their plant configuration to actually put it all into powder and avoid making those loss-making products."

ASB Bank chief economist Nick Tuffley said Fonterra's decisions will be tricky because other producers are aware of the opportunities, particularly in China.

With the lead-in time for new milk drier plants being three to four years, he said , it will be challenging for Fonterra to get the timing of any new investment right. If Fonterra gets it wrong, it risks over-supplying the market.