Fonterra lifts milk price, citing ‘strong demand’

(AgriMoney) – Fonterra lifted its estimate for milk values in 2013-14 for the third time in two months, citing strong demand from China – whose dairy market received a fillip in terms of a further investment by private equity giant KKR.

Auckland-based Fonterra, the world’s top milk exporter, raised by NZ$0.50 to a record NZ$8.30 per kilogramme of milk solids its forecast for the price it will pay its producers this season.

The increase, the third since Fonterra in late July set out its initial forecast of NZ$7.00 per kilogramme of milk solids, extends a round of rises by Oceania dairy groups as the region approaches peak production season with demand remaining strong.

John Wilson, the Fonterra chairman, noted “continuing strong international prices for dairy, particularly whole milk powder, driven by robust demand from Asia, especially China”.

According to Euromonitor, Chinese dairy consumption has grown by 10% a year over the last five years.

And it represents a fillip for New Zealand producers said to be enjoying a strong start to 2013-14 for production, contrasting with the drought-hit close to last season.

New Zealand real estate professionals last week said that “kind weather” meant that early spring grass growth is “the best experienced by many” farmers.

Margin pressure

However, for Fonterra itself, the higher milk prices bode ill for margins, with Theo Spierings, the co-operative’s chief executive, warning that rises in milk powder prices are “significantly” outpacing “the relative prices of cheese and casein”, major dairy processing products.

“The higher cost of goods will make it more difficult to drive earnings growth in our consumer and foodservice businesses in the first half of this financial year,” Mr Spierings said.

“Earnings will be significantly lower than the strong performance in the first half of 2013.”

While the group stuck with a forecast of a dividend for its shareholders of NZ$0.32, it noted that it could “draw upon its balance sheet and cash flow performance” to help fund the payout.

Results spree

The comments come amid a mini-results season for dairy groups, with New Zealand’s Synlait following up a trading statement from the UK’s Dairy Crest on Monday by unveiling a near-tripling in earnings for the year to the end of July to NZ$11.5m.

The increase, which beat a forecast of NZ$10.8m made before its flotation in July, came on an 11.5% rise to NZ$420m in revenues.

Fonterra is due to release its annual results on Wednesday, with statements from New Zealand rivals Tatua and Westland also imminent.

On Monday, Australia’s Murray Goulburn unveiled a jump of 141% to Aus$34.9m in earnings for the year to the end of June, on revenues up 1% at Aus$2.39bn.

KKR backs Chinese dairy, again

In a further sign of the strong Chinese demand for dairy, private equity giant KKR on Tuesday revealed that it is to invest in two large dairy farms in the country, four months after cashing in on its last investment.

KKR said it was with listed dairy group China Modern Dairy Holdings and Chinese private equity firm CDH Investments to invest $140m building two 10,000-cow farms in Shandong province over two years.

The growing demand for premium dairy products is driving strong demand for high quality milk from large scale farms,” said Gao Lina, the Modern Dairy chief executive.

Euromonitor data show the Chinese market for premium dairy products outpacing the sector average, increasing its share to 19% from 10% over the past five years.

Despite the sector growth, China’s annual dairy consumption is, at 10 kilogrammes per capita, less than the 32 kilogrammes per head in Japan, and 78 kilogrammes per head in the US.

Shareholding split

KKR, based in the US, will hold 61.5% of the joint venture, with CDH owning 20.5% and China Modern Dairy 18%.

The announcement follows the sale by KKR and CDH in May of 27% of China Modern Dairy for $410m.