Fonterra says price gap between milk powder vs casein and cheese is easing

Fonterra CEO Theo Spierings
Fonterra Cooperative Group 12-month price history (NZX.com)

Fonterra Cooperative Group [NZX:FCG], which posted a 53 percent drop in first-half profit as gains in prices of milk powder ran ahead of products such as casein and cheese, says the gap is becoming less pronounced - a sign that pressure on margins may ease.

Prices of reference commodity prices used to calculate the farmgate milk price- whole and skim milk powder, butter milk powder, butter and anhydrous milk fat - rose 44 percent to $5,981 a tonne in the third quarter while non-reference product prices, cheese and casein, rose 22 percent to $7,499 a tonne.

That's a smaller gap than in the first quarter, when prices gained 62 percent and 22 percent respectively, the Auckland-based company said in its latest global dairy update.

Last November, Fonterra took a $157 million provision against inventory of specialised ingredients and branded consumer products produced by its NZ Milk Products division because rising input costs squeezed margins. In March this year, it posted a slump in first-half earnings as gross margin shrank to 12.5 percent from 18.6 percent.

The company has said it can't process more milk into higher returning milk powder products until it builds more driers because of the mix of its factories, which can produce milk powder versus cheese and casein at a ratio of 75 percent to 25 percent.

The volume of sales of reference commodity prices shipped fell 2 percent in the third quarter as Fonterra took advantage of higher prices to ship more volume earlier in the year, while some was contracted for shipment in the fourth quarter. The volume of non-reference products shipped fell 13 percent.

Total production volume rose 21 percent in the third quarter, reflecting the impact of drought in the same quarter of 2013.

Milk collection across New Zealand for the 11 months ended April 30 rose 8 percent to 1,524 million kilograms of milk solids.

Units of the Fonterra Shareholders' Fund were unchanged at $6.0.

(BusinessDesk)

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