Excess capacity in Australian dairy is the ‘new norm’: Fonterra

Fonterra’s strategic review continues with a Victorian factory closure and possible sales of Brazilian JV and Chinese farms.

Excess capacity in the Australian dairy industry is the “new norm”, the chief executive of New Zealand’s Fonterra Co-operative Group said in a Q3 market update.

Fonterra announced it was closing its factory at Dennington, Victoria as its Australian Ingredients business “continues to feel the impact of the drought and other significant changes that mean there is excess manufacturing capacity in the Australian dairy industry”.

The move comes following the launch of a strategic review covering “all major assets” announced in September 2018, after the co-operative reported its first-ever annual loss of NZ$196 million ($127 million; €114 million) for FY18.

Fonterra chief executive Miles Hurrell said in a statement: “This is not a one-off for this season, it’s the new norm for the Australian dairy industry and we need to adapt.

“We need to get the most value from every drop of our farmers’ milk and, with the reduced milk pool in Australia, we must put it into our highest returning products and most efficient assets. Dennington is over 100 years old and not viable in a low-milk pool environment.”

In an update to its strategic review, Hurrell said that Fonterra has agreed with partner Nestle to consider a sale of their respective stakes in their Dairy Partners America Brazil joint venture. DPA Brazil distributes chilled dairy products throughout the country.

Fonterra has also started a strategic review of its two wholly owned farm-hubs in China. Hurrell said that while there was still a valuable opportunity to supply fresh milk to the Chinese market, it did “not necessarily mean that we need to continue to have large amounts of capital tied up in farming hubs” in the country.

WhenFonterra announced its annual loss last year, it put its difficulties down to several large asset writedowns and a squeeze on margins due to an increased farmgate milk price and higher operating expenses.

The organization sold the livestock division of its Farm Source business to Carrfields Livestock in January this year.

Fonterra reported that its revenue for the nine months to 30 April 2019 was NZ$15 billion, up 1 percent on the same period last year, but normalized EBIT was down 9 percent to NZ$522 million. Its Australia Ingredients business continued to face challenges and was taking “longer than planned” to lift performance, the firm said.

It forecast a 2019-20 farmgate milk price range of NZ$6.25-NZ$7.25 per kilogram of milk solid, with the new season beginning on 1 June.

It also narrowed its 2018-19 forecast farmgate milk price range from NZ$6.30-NZ$6.60 per kilogram of milk solid by 20 cents to $6.30-$6.40, in a reflection of favourable foreign exchange movements and slightly weaker than expected pricing for whole milk powder and skim milk powder.