Fonterra Plans Overseas Investment as Demand to Boost Prices

Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, plans to boost investment in dairy farms and plants in China and other emerging markets as rising demand pushes milk prices higher in the next decade.

“We need to look outside of New Zealand, we need to look at other milk pools,” Chief Executive Officer Theo Spierings said on a conference call today after the Auckland-based company reported an 18 percent rise in first-half profit. “If we only focus on New Zealand, we’ll lose market share, we’ll lose relevance.”

Demand for food commodities including dairy is rising in emerging markets as economic growth lifts incomes and spurs sales of protein-rich meals. Fonterra, which accounts for about 40 percent of the global trade in dairy products, forecasts the market will increase at least 100 billion liters by 2020, led by customers in China, India and the Middle East-Africa region. Demand will outpace supply in the medium term, ensuring prices trend higher, the company said today.

“It’s an opportunity we need to grasp,” Spierings said. New Zealand production is forecast to rise about 5 billion liters by 2020, and exporting that to the world will always remain the company’s top priority, he said.

Fonterra wants to accelerate its operations in China, where it already owns dairy farms, and will consider partnerships and supply agreements as well as ownership, he said. The company plans to review operations in the U.S. and Europe, where the demand outlook is slower, in order to maximize cash generation from its strongest markets.

Record Prices

“I’m expecting some softening over the coming quarter, but it will go back to similar levels to where we are now for next year,” Spierings said in a Bloomberg Television interview today, referring to prices. Whole milk powder is currently trading between about $3,300 and $3,500 a ton, he said.

Prices have dropped about 6 percent this year after record prices in 2011 spurred farmers around the world to boost production. Global supply growth has outpaced demand for dairy products after good weather in most regions, while demand will remain compromised by weak economic conditions, Rabobank International said on March 20.

“We want to do less but with more intensity,” said Spierings. “We have to generate more cash if we want to grow faster.”

The company is working through its proposed restructure, which it expects to put in place this year, and is seeking a stable capital base. Without that framework, the company “may have to make other choices” regarding its strategy, Chairman Henry van der Heyden said on the conference call.

Output Surge

Net income rose to NZ$346 million ($283 million) in the six months ended Jan. 31, from NZ$293 million a year earlier as milk production surged, the company said in a statement today. Sales gained 7.2 percent to NZ$10.03 billion.

Last month, the company said milk delivered to its New Zealand plants rose 9.8 percent in the eight months ended Jan. 31 from a year earlier amid favorable farming conditions.

The company maintained its March 12 forecast milk payment to farmer shareholders of NZ$6.35 per kilogram of milk solids. It also maintained its forecast of a full-year dividend of 40 cents to 50 cents, based on earnings of NZ$570 million to NZ$720 million in the year ending July 31.

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