Fonterra is under pressure to raise the milk payout to cash-strapped farmers after it announced a $506 million net profit this morning, but some warn the market is still too volatile.
The Fonterra headquarters on Princes St in central Auckland. Photo: RNZ / Kim Baker Wilson
Plummeting dairy prices, weaker profits and cuts to Fonterra's worldwide workforce in a corporate shakeup have made for a tough 12 months for the dairy co-operative and its 10,500 farmer shareholders.
Analysts expected a profit of about $460 million, compared with $179 million last year and $770 million in 2013.
The co-operative said on Monday it was shedding 750 staff, saving it a total of $100 million a year.
Independent dairy industry consultant Peter Fraser said the bad news was out of the way.
"Given the international dairy markets are still not looking good, I think that an absence of bad news will be pretty much good news for them so I think they'll play it straight."
The recent bounce in global dairy prices has given a glimmer of hope to farmers with mounting debts.
Waikato farmer Chris Lewis wanted a signal from Fonterra that prices had bottomed out.
"On farm its been wet and cold, production is down New Zealand-wide, so when you're not putting much milk in the vat and the payout is down, yeah it does get you down a little bit. But that little bit of optimism on the horizon keeps you going every day."
Mr Lewis, who is Waikato Federated Farmers president, said the pressure was on Fonterra to lift its payout for the last year and its forecast of $3.85 per kilo of milk solids for this season after two rivals announced higher payouts.
"The co-op is there to return all profits to their shareholders, unlike those two private companies, so they should be in a better position to match their profit or even better it."
ASB chief economist Nick Tuffley expected the payout forecast to rise but the production outlook to fall.
"We're assuming that production is going to fall five percent in New Zealand in this season and that will be the biggest drop we've seen since 1999."
Analysts said production cuts would put a squeeze on supply and keep dairy prices up.
Prices have also jumped dramatically in the last six weeks after Fonterra cut the volume it has sent to the fortnightly global auction.
Peter Fraser, meanwhile, said shareholders needed to know what was happening to the product it was not selling at auction.
"This is the peak of our season so Fonterra factories will be going absolutely flat out but it does beg the question of what are they doing with all of that product?"
As for its results, analysts expected a big improvement on the first six months when it reported a 16 percent drop in profit.
But ANZ rural economist Con Williams said he wanted Fonterra to be more open about its business shakeup, plans to sell more branded products and its struggling Australian business.
"If we can get a better view of the underlying drivers for profitability in their business, I think it'll shape peoples' longer term views around Fonterra."
Meanwhile, farmers facing a new hurdle - the threat of a drought brought by the El Nino weather pattern - said a small rise in the payout or dividend would help but they would still be running at a loss.
Northland farmer Roger Hutchings said he tried to make some positives out of the financial situation.
"It's difficult to go through a financial downturn like this but it actually does have a positive effect. It makes us wary of our costs - and the same goes for Fonterra too."
