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Synlait flags pressure on milk prices from swollen inventories

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Synlait Milk highlighted the pressure on dairy prices from swollen company inventories –including its own - even as it unveiled a jump in profits, helped by lower milk costs and growth in specialty product sales.

The New Zealand-based processor - flagging the boost to world milk supplies from buoyant output in the European Union after the removal of quotas a year ago – said that the "surplus stock is accumulating".

On top of the stockpiling by the EU itself under its intervention scheme, the more important and "larger accumulation of stock occurs in the inventories of companies manufacturing and purchasing dairy ingredients", Synlait said.

"This can be seen in our balance sheet, and in the balance sheet of other companies in the international industry," the group said, flagging growth of 28% to $163.2m in its own inventories over the year to the end of January.

"All this has translated to a long period of very low prices for dairy commodities and an unsustainably low milk price for New Zealand dairy farmers," terming the saying the industry was facing its "most significant downturn… in decades".

Infant formula boost

However, Synlait itself achieved earnings of NZ$10.2m for the August-to-January, bouncing back into the black after a NZ$6.43m loss a year before,

While costs were depressed by weak milk prices, sales rose 8.1% to NZ$213.5m, lifted in particular by increases sales of canned infant formula, which it has promoted through tie-ups with groups such as a2, the specialty milk marketing company.

Graeme Milne, the Synlait chairman, said: "Our core strategy is to partner with leaders in the infant formula and adult nutrition industries," which offer the company the prospect of better margins than selling into dairy commodity markets.

"These half year results demonstrate the early success of this strategy."

'Strong prospects'

And the company told investors to "expect a strong second half" of its financial year, helped by a continuation of these trends.

"We have committed customer orders to achieve an almost four-fold increase in canned infant formula sales in [the full financial year] with manufacturing capability meeting these expectations," Synlait said.

The group added that it was accelerating advance milk payment to its farmer suppliers, to "support them through a difficult period of cashflow".

Synlait shares closed up 3.3% at NZ$3.15.

By Agrimoney.com

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