Fonterra touts strong annual financials amid continuing milk price volatility

22 Sep 2023 --- Global dairy nutrition cooperative Fonterra has delivered solid earnings for FY23, making headway across critical strategic initiatives despite a farmgate milk price that has dropped constantly over the season. For the financial year ending July, profit after tax stands at US$1.6 billion, up US$994 million, with a final season milk price of US$8.22 per kgMS.

The cooperative’s forecast for 2023/24 is for a farmgate milk price range of US$6 to US$7.50 per kgMS, with a midpoint of US$6.75 and reflects reduced demand for whole milk powder from key importing regions. 

“Our 2022/23 season farmgate milk price was impacted by reduced demand for whole milk powder from key importing regions. As the financial year progressed, we saw Global Dairy Trade prices drop, with the average whole milk powder price down 16% compared to last season,” notes Miles Hurrell, CEO of Fonterra. 

“We recognize the impact the reduced farmgate milk price has on farmers’ businesses and have used our strong balance sheet to introduce a new Advance Rate Schedule guideline to assist on-farm cash flow.” 

Its FY24 forecast earnings range between 45 to 60 cents per share for continuing operations. “We acknowledge that across the year, farmers will continue to feel the pressure from high input costs and a reduced Farmgate Milk Price,” Hurrell notes.

Healthy margins across geographies
Fonterra is progressing work in its innovation portfolio, including establishing a joint venture with Royal DSM, Vivici, which is exploring commercial opportunities in fermentation-derived ingredients.

In addition, the cooperative is set to launch a corporate ventures arm, Nutrition Science Solution (NSS), which made its first strategic investment in a minority stake in Pendulum, a biotech company specializing in metabolic health. 

The cooperative reported a return on capital of 12.4% for the last 12 months, up from 6.8% in a similar timeframe. Normalized profit after tax was US$1.3 million, up US$738 million and excludes the US$248 million net gain from divestments.

Global Markets reported profit after tax increased from US$77 million to US$385 million due to higher sales volumes and improved pricing partially offset by the impairments in its consumer channel. Greater China reported a profit increase from US$11 million to US$284 million.Fonterra will prioritize its New Zealand business and is establishing a joint venture with Royal DSM.

There was a gain on sale of US$260 million from Fonterra’s Chilean Soprole business. 

“There were a number of key drivers that helped us deliver this result, including favorable margins in our ingredients channel, in particular the cheese and protein portfolios,” Hurrell notes. 

“Across the second half, the operating performance of our consumer channel strengthened due to improved pricing. However, we adjusted the long-term outlook for our Asia brands and Fonterra brands New Zealand business, resulting in full-year impairments of US$101 million and US$121 million respectively.”

The cooperative will implement a range of projects to streamline operations and has introduced two new metrics to track the progress – cash operating expenses per kgMS and gross profit from core operations per kgMS targeting a 2% New Zealand operational cash cost improvement every year to support efficient operations. 

Fonterra is updating its long-term strategy, which it will reveal early in 2024.

Milk collections and emissions goals
Despite significant challenges that many farmers faced across New Zealand, including rising input costs and adverse weather events in the North Island early in the year, Fonterra’s milk collections stood at 1,480 million kgMS at the end of the season.

“Across FY23, we completed the divestment of China farms and Soprole as part of our strategic choice to focus on New Zealand milk. However, we’re pleased to announce a strong full-year dividend of 50 cents per share – comprising an interim dividend of 10 cents per share and a final dividend of 40 cents per share,” Hurrell notes. 

“Our FY23 performance demonstrates that we focus on the right strategic priorities. This said we are aware that there are challenging conditions on the ground for many of our farmers,” says Hurrell. 

With the release of its long-term strategy in September 2021, Fonterra has made good progress toward its 2030 goals. The cooperative has stepped up its emissions reduction goal for business operations and introduced a 50% absolute reduction in Scope 1 and 2 emissions by 2030, an increase on the previous target of 30%. 

“We have held discussions with our farmers on why we need to introduce a Scope 3, or on-farm emissions target, and plan to announce our target before the end of calendar year 2023,” Hurrell concludes. 

By Inga de Jong