29 Jan 2014

Synlait fires price broadside, says Fed Farmers

6:26 am on 29 January 2014

Federated Farmers says Synlait has fired the dairy equivalent of a broadside by raising its forecast milk price for the season to match Fonterra's proposed payout.

The Canterbury milk processor has lifted its farmgate price from $8 per kg of milk solids to $8.30 - $8.40 per kg, that matches Fonterra's current forecast milk price of $8.30 per kg, with a 10 cents a share dividend on top of that.

Westland Milk Products has also lifted its forecast to $7.90 - $8.30 per kg of milk. Other processors are also aiming to stay competitive with their prices.

Federated Farmers dairy chair Willy Leferink says that's keeping the pressure on the big co-operative and although Fonterra can't react instantly it has some investments for next year which it will probably use to try to eliminate the differences.

He says Synlait has shored up its balance sheet with the Chinese and the Dutch coming in and it's producing milk powder which everybody wants.

Mr Leferink says the increase in the advance payments from dairy companies is also helping farmers manage their with cash flow following last year's drought.

Synlait has also responded to the continuing strength of world dairy commodity prices by bumping up its profit forecast, from $19.7 million to between $30 - $35 million.

Chinese reforms disrupt infant formula trade

However, it says Chinese government reforms to tighten regulations controlling the infant formula trade are proving disruptive, and may prevent it from reaching its target of 10,000 tonnes of infant formula and nutritional sales this financial year.

Synlait is selling an increasing proportion of its milk powders to infant formula customers, either as finished canned products or ingredients.

Managing director John Penno says while Chinese government moves are disruptive now, they could work in the company's favour in the end.

He says he would expect quite a number of smaller infant formula businesses in China and sending product to China to go out of business as a result of these regulatory changes.

Mr Penno says even the larger players are standing back from the market to try and ascertain how the changes will impact their businesses as they move forward and how they will reconfigure their businesses.

He says long term that will be good for Synlait because it will support some of its large Chinese customers and will be good for the multinationals it engages with.

But Mr Penno says in the short term it is causing some disruption.