Global Dairy exporter Fonterra reported a 41 per cent fall in first-half earnings courtesy of its interim results released today. According to the New Zealand based farmer owned co-operative margins were reduced on the back of higher costs, high milk volumes, and a lack of capacity to process higher-yielding products.

The company announced today that normalised earnings before interest and taxes (EBIT) fell to NZ$403 million (€251 million) for the six months to Jan. 31, compared with NZ$693 million(€432 million) a year ago.
In terms of net profit after tax the company report a 53 percent fall to NZ$217 million, even as revenues climbed 21 percent to NZ$11.3 billion.

According to Fonterra CEO Theo Spierings. “The past six months has been a period of mixed fortunes for the Co-operative.”

“Higher dairy commodity prices have put increasing pressure on margins in our consumer and foodservice businesses. We had to strike a balance between passing on rising costs immediately or continuing to build our market presence to secure long term growth.”

 “Volatility is a fact of life in dairy. We are very focused on delivering a consistently strong Farmgate Milk Price, as well as stable and growing earnings over the medium to long term.”

“Taking the longer term view has constrained profitability during this run of strong commodity pricing, but we are positioning ourselves for the future with consumer and foodservice volumes in key strategic markets like Asia (up 10 per cent, excluding Sri Lanka which was affected by the temporary suspension of operations in August 2013).

“Being disciplined with operating expenses, which were flat for the period, contributed to our ability to offset some of the rising input costs,” he said.

Fonterra should be riding on the crest of a wave as Dairy prices have been rising as huge demand from China and other developing countries for milk powder to produce infant formula and other products for a growing middle class.

However the company costs have been increased due to higher milk prices and capacity issues have impact on the business meeting demand.

In his statement today Spierings also noted “The Season saw record milk volumes collected across the October – November peak period, and milk volumes collected for the Season to date increased by four per cent on the prior year to 1,120 million kgMS.

He added: “We processed as much of this milk into the higher returning milk powder product streams or reference commodity products as we could. However, our current asset footprint meant that around 25 per cent had to be processed into cheese, casein and other Non-Reference Commodity Products which earned negative returns over the period.” •    Forecast Cash Payout for the 2013/14 Season of $8.75, up 42 per cent
–    Farmgate Milk Price $8.65 per kgMS
–    Estimated full year dividend of 10 cents per share
•    Revenue $11.3 billion, up 21 per cent
•    Normalised EBIT $403 million, down 41 per cent
•    Net profit after tax (NPAT) $217 million, down 53 per cent
•    Earnings per share 13 cents, down 54 per cent
•    Interim dividend of five cents per share