Fonterra profit tipped to jump 136%

4:12 pm on 21 March 2016

ANALYSIS: Dairy giant Fonterra is expected to report a bumper profit this week, at a time when its farmer-suppliers are struggling with high-debt and a low forecast payout.

Fonterra building

Fonterra's headquarters on Princes St in central Auckland Photo: RNZ / Kim Baker Wilson

The co-operative - New Zealand's biggest company and exporter - will report its half-year results on Wednesday.

Broking house Forsyth Barr is forecasting an underlying profit of $389 million, up 136 percent on last year.

It expected revenue to fall 5 percent to just over $9 billion.

Paradoxically, the slump in dairy prices - which has resulted in a sharply lower forecast payout to Fonterra's beleaguered farmer-suppliers - will be the main reason for the strong profit, because weak milk prices reduce the cost of making its consumer products.

An independent consultant and former Lincoln University professor of agribusiness and international trade, Keith Woodford, said Fonterra had to make as much as possible.

"Personally, I'd be looking for something north of $400m for this six months, if they're to get to over $800m for the year," he said.

"And that's where they need to be heading towards if they're going to pay the dividend they've been suggesting."

The level of added earnings from Fonterra's commercial activities will be a vital boost to the low forecast of $3.90 a kilogram of milk solids. The last estimate of additional earnings was 45 to 55 cents a share.

Fonterra has blamed a glut of milk around the world, ramped up production in the European Union, falling oil prices, sanctions against Russia and weak Chinese demand as key pressures on the sector.

Some of the global factors that Fonterra was blaming might actually help its profit, Mr Woodford said.

"It's because of those fluctuations - which Fonterra can do almost nothing about - that the market will be looking to see what's going on in the underlying areas," he said.

"[Those underlying areas are] Australia and consumer goods - to some extent in China as well - because that's where in the long-run the consumer markets are," he said.

ANZ rural economist Con Williams said further support to farmers was front of mind.

"From a farmer's perspective and also other people in the industry - such as the banking fraternity - [they] will be looking at things like whether they can extend their loan scheme that they did late last year," he said.

Last year, Fonterra offered a two-year interest-free cash loan to struggling farmers, of 50 cents for every kilogram of share-backed milk solids produced from 1 June to 31 December.

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