Russia’s Ukraine invasion puts extra pressure on milk prices: Fonterra

Russia’s invasion of Ukraine is adding pressure to an already tight global dairy supply market, warns the world’s biggest dairy exporter.

Fonterra Australia boss René Dedoncker says his top focus is ensuring the business is ‘still attractive to future owners’. Picture: Aaron Francis/The Australian

Reverberations of Russia’s invasion of Ukraine is being felt across Australian farms and dairy processors as the war drives up the cost of fuel, grain and fertiliser, countering gains from record milk prices.

Fonterra, the world’s biggest dairy exporter, is expecting record farm gate prices to continue for at least the next 12 months, with the Russian invasion exacerbating a global tight milk supply market.

This puts pressure on the New Zealand co-operative to push further up the value chain with higher margin products such as branded butter and cheese. Meanwhile, the conflict has driven up input costs for farmers, which despite the high milk prices, were already battling a cost crunch from pandemic disruptions.

Fonterra’s revenue jumped 9 per cent to $NZ10.8bn ($10.11bn) for the six months to January 31. But its net profit fell 7 per cent to $NZ364m as it struggled to recoup a 30 per cent surge in farm gate prices from its suite of dairy products.

Fonterra Australia managing director René Dedoncker said “certainly even before the Russian Ukraine crisis emerged, we were already seeing an imbalance between supply and demand internationally”.

“There hasn’t been enough product and Russia/Ukraine is … adding to that now”.

Mr Dedoncker said Fonterra had deployed business experts across its farmer supplier base to help manage higher input costs.

“The three biggest challenges for dairy farmers are fuel, fertiliser and labour. Those three things are creating a much higher cost base and certainly that‘s where the higher milk price comes into make sure that the margin that they’re making between milk price and cost continues to be profitable,” he said.

“This is where our farm source team makes a difference. Our farm source teams are deployed in all of our farming regions and they are groups of experts in agronomy, economics and on farm business practices. That is quite different to any of our competitors and it does make a huge difference, particularly in times like this.”

It comes as Woolworths ended its 10c a litre drought-relief levy payments to dairy farmers, saying it was no longer necessary after record rainfall, and Rabobank saying while the “foundations are in place for ­another good profit in the 2022-23 season”, there are “lingering production challenges”.

But Mr Dedoncker said Fonterra’s Australian operations, which is currently subject to an ownership review, including a potential an ASX float, delivered a “solid performance”.

Earnings before interest and tax soared 84 per cent to $NZ59m ($55.2m) in the half year, while gross margin firmed from 11.5 to 15 per cent. This was despite milk collections declining 2 per cent to 69 million kilograms (milk solids).

Mr Dedoncker said while Fonterra’s Australian business – which includes the Western Star and Perfect Italiano brands – benefited from “robust Australian food service and consumer channels”.

The co-operative has appointed Jarden and UBS as advisors for its ownership review, which Mr Dedoncker said was progressing, despite having no timelines for its completion.

Fonterra is planning to spin off its Australian and Chilean operations to better focus on its New Zealand operations, which could continue to export across the globe, including to China.

A proposed IPO could value Fonterra’s Australian business at more than $1.2bn, based on earnings before interest and tax of $NZ74m – a 37 per cent increase on the previous year. This would put its potential market capitalisation not far behind Bega Cheese’s $1.6bn.

“We’ve done a lot of work. And we’re deliberately making sure that we take the time to get it right. So there’s been a lot of effort that’s gone into it and my primary interest for the last few months has been to make sure I’ve got a healthy business that’s performing and that healthy businesses (is) still attractive to future owners.”

Fonterra will pay an interim dividend of NZ5c a share.