Pricing in trouble: Fonterra predicts volatile year ahead despite stellar China and consumer products performances

03-Apr-2024 - Last updated on 03-Apr-2024 at 02:30 GMT

Fonterra has predicted a volatile year ahead despite stellar performances from its China business and consumer product portfolios. ©Getty Images

New Zealand dairy giant Fonterra has predicted a volatile year ahead despite stellar performances from its China business and consumer product portfolios in the first half of the year, especially with milk prices expected to rise in the next few months.

Fonterra recently announced its H1FY2024 interim results, reporting a strong 23% year-on-year increase in profits after tax to NZ$674mn (US$385.5mn) despite a slight revenue downturn to NZ$11.25bn (US$6.7bn).

This increase in profitability was attributed mainly to an improvement in its consumer products such as Anchor, Fernleaf and Anlene; as well as its business in Asia, particularly China.

“A key driver for us this interim period has been China, where we are seeing a gradual rebalancing of domestic milk production and also a strong increase in demand,” Fonterra CEO Miles Hurrell told investors at a closed conference announcing the financial results, which FoodNavigator-Asia has viewed.

“UHT cream has been a particularly important import into China [and] a key indicator of recovery here will be post-Chinese New Year consumption and the extent of domestic milk production as it enters its own milk season.

“There is also increasing demand from several key import markets in the Asian region, particularly South East Asia, Middle East and Africa, particularly in the Consumer channel.

The co-op’s acting CFO Simon Till added that so far this year, the firm’s consumer food products have been the primary contributor to profitability, compared to a strong demand for ingredients such as lactose in the previous year.

“Last year, our H1 results heavily weighted towards ingredients [and there were negative] impacts in the consumer channel, but this year things are more balanced and consumer products have been the key driver,” he said.

“Consumer products saw an overall improvement of NZ$302mn (US$180mn), half of which is due to the 2023 numbers which saw impairments in Q2, but the other half is due solely to improved underlying performance.

“This was driven by both higher volumes up by 8% and higher margins – here, drivers included favourable pricing across regions and the lower cost of milk.”

Uncertainty rife

That said, Hurrell stressed that there is some indication that sales may dip somewhat in the second half of the financial year due to higher Global Dairy Trade (GDT) prices.

“All of this trade is taking place against a background of market volatility and geopolitical uncertainty,” he said.

“In H2 we expect more pressure on the margins for consumer products due to the higher cost of milk, [and] even in China macroeconomic indicators are still weak.

“We also expect that environmental regulations may further affect milk production, particularly in the EU.

“As such we are taking steps to improve efficiencies [such as] merging our Australia and Fonterra Brands New Zealand businesses from May 1 this year - These two units share many similarities, and we expect the integration to create scale efficiencies.

“We also continue to partner with [logistics firm] Kotahi and ensure diversification across markets, which means we’re well prepared for disruption in global supply chains or changes in demand from key importing regions.”