Dairy divide hurts Fonterra, but boosts Synlait

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 profit hopes.

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 solids.

'Favourable product mix'

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.

Market reaction

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.

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