Strong international dairy markets mean 2010/11 could mean high gains for Fonterra farmer shareholders, the company said today.
The New Zealand based co-operative confirmed its current forecast payout range for the 2010/11 season of $7.90 to $8.00. The firm said that this year’s payout may top its previous 2007/08 record of $7.90.
According to Fonterra Chairman Sir Henry van der Heyden, current high dairy prices reflect a change in supply and demand for food internationally.
Van der Heyden said the company is benefitting from a combination of demand growth from China and other Asian markets and tighter international supply, due to adverse weather conditions in many parts of the world.
“To date, these higher prices have more than offset the negative effects of a stronger New Zealand dollar against the US dollar, in which most international dairy sales are denominated,” he said.
Fonterra reported a 21 per cent leap in sales to $9.36bn, for the six months ending 31 January 2011, up from $7.7bn the year before.
Margin squeeze
But despite yielding such positive six month results, the company said that rising dairy prices are putting pressure on the company’s operating earnings.
Fonterra’s ingredients businesses is an area of particular concerns, said the company, where the cost of raw milk represents a large proportion of total operating costs.
“We must be mindful of the impact that dairy prices can have on demand in some markets, as well as on supply growth around the world. As prices continue to climb, the possibility of a downward correction can increase and farmers should always need to be prepared for a potential global price drop,” said Van der Heyden.
The Chirstchurch and Japanese earthquakes in February and March will also be reflected in the second half of the financial year, according to the firm.
At this stage Fonterra said it is in the process of quantifying the impact that the natural disasters will have on its business, which will be primarily in the area of inventory losses. The company said it expects these losses to be covered by insurance to some extent.