Livestock Improvement forecasts drop in 2016 earnings, extends credit to farmers feeling the pinch

Net profit fell 24 percent to $13.7 million in the year ended May 31.

Livestock Improvement Corp [NZAX: LIC], a farmer cooperative that sells bull semen and manages a dairy genetics database, said it expects a drop in 2016 earnings as farmers reduce spending in the face of a lower milk payout.

The Hamilton-based cooperative, known as LIC, didn't give details of the forecast profit drop. Net profit fell 24 percent to $13.7 million in the year ended May 31. Excluding fluctuations in the value of its bulls, profit fell 41 percent to $40.8 million last year. Revenue in 2016 is still expected to exceed last year's $232 million.

A drop in net profit would mark the fourth straight annual decline at a company that is aiming to reach $1 billion of sales by 2025 from its existing business, new products, acquisitions and growth offshore. LIC lifted research and development spending by 13 percent to $16.9 million last year and spent $48 million on capital investments. The projected drop in earnings for 2016 reflected the company's intention of maintaining services to farmers and allow "its essential capital investment to programme to continue," chairman Murray King said.

"Although it is still early in the season for the LIC business, this season's lower forecast milk payout has created challenging financial situations for many of the country's dairy farmers, and as a co-op LIC is also linked to the industry's volatility," King said. "Our farmers are reviewing their cost structures and assessing what discretionary spend is non-critical, and as their cooperative we are doing the same."

LIC "is offering farmers a range of extended credit and payment support options this season, to help ensure investment in good genetics and future productivity is not compromised," it said. "With no long term debt on the balance sheet currently, the cooperative remains in a strong position for the year with solid support from banks."

Fonterra Cooperative Group last month raised its forecast payout to $4.60 per kilogram of milk solids, from what would have been a decade-low $3.85/kgMS, in response to improved international demand and lower local production. That's still down from the record $8.40/kgMS paid in 2014.

Dairy product prices climbed in last week's GlobalDairyTrade auction for a fourth consecutive time, after nearly six months of declines. Last week Fonterra said farmers reduced milk production in response to lower prices.

LIC's non-voting investment shares were last at $3.80 and have dropped 38 percent in the past 12 months.