Fonterra stunned the dairy market by forecasting a halving
in earnings and slashing its dividend estimate even as smaller rival Synlait, better
placed to exploit soaring milk powder prices, revealed it was to upgrade its
Fonterra, which reported operating profits of NZ$1.02bn for
the year to the end of July, said that earnings for the current year would come
in at NZ$500m-600m.
The New Zealand-based group, the world's biggest dairy
exporter, slashed its forecast for dividends to NZ$0.10 a share from an earlier
indication of NZ$0.32 a share.
And it revealed that farmers would take a knock too in terms
of a forecast milk price for 2013-14 kept at NZ$8.30 per kilogramme of milk
solids, when powder prices indicated a payout of NZ$9.00 per kilogramme of milk
The setbacks were in sharp contrast to a statement from domestic
rival Synlait Milk that it expects to "outperform" its financial targets for the
year to the end of July 2014, for which it has forecast profits of NZ$19.67.
The forecast reflects a "favourable product mix", with the
relatively high price of milk powders compared with other dairy goods, such as
cheese, playing to the company's production portfolio, and expected to continue.
"The company expects that ongoing demand, particularly from
China, will mean that this [price differential situation] will be maintained
for much of the current season," Synlait said.
China is the biggest buyer of milk powder, of which New Zealand
is the top exporter, with shipments growing by 9% a year since 2010.
Chinese demand for skim milk powder, used in the likes of
infant nutrition products which are increasingly popular as mothers take a
growing place in the country's workforce, is soaring by 25% a year, according
to Commonwealth Bank of Australia.
Powder vs cheese
However, Fonterra, while the world's top milk powder
exporter, has found its ability to exploit this trend limited by its inability
to lift above 70% the proportion of its product portfolio going to powders.
"That is why the remaining 30% of milk is being converted to
cheese and casein, which are currently generating lower returns," Theo
Spierings, the co-operative's chief executive, said.
The relatively low price of the likes of cheese and casein
reflects trade barriers, demand trends and milk pricing regulations in the
likes of Europe, Japan and the US, he said.
Fonterra, which on Wednesday unveiled plans for a NZ$235m milk
powder plant at Pahiatua on New Zealand's North Island, estimated at $800m the
hit from the expanded discount of cheese to powder.
In Auckland, shares in the Fonterra shareholder fund, which
offer investors a chance to tap into the co-operative's dividend flows, closed
down 5.7% at NZ$5.75, hitting an all-time low of NZ$5.48 earlier.
Synlait shares soared
5.3% to NZ$3.95, their highest close since the group floated in July.