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Fonterra Full-Year Earnings Fall After Drought Curbed Output

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Sept. 25 (Bloomberg) -- Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said full-year earnings fell after a drought curbed milk production.

Earnings before interest, tax and one-time items declined 3 percent to NZ$1 billion ($828 million) in the year ended July 31, the Auckland-based company said in a statement. Fonterra said yesterday that earnings in the first half of the current year will be “significantly lower” than a year earlier.

“2013 was a year that tested our resilience,” Chairman John Wilson said in the statement. “After a superb first six months for both production and performance, our farmer shareholders endured a drought which in some regions was the worst in nearly 70 years.”

The drought drove up prices and squeezed Fonterra’s margins. Today’s results don’t capture the potential impact of the contaminated milk scare that erupted in early August and prompted temporary import bans on some Fonterra products across Asia. Testing later showed that food safety fears were unfounded.

Fonterra had record sales and revenue from two GlobalDairyTrade auctions in August, which it said showed continued confidence in its products.

Shares in the Fonterra Shareholders’ Fund, a publicly traded trust that tracks the cooperative’s dividend payout and earnings, extended their declines. They fell 1.6 percent to NZ$6.96 at 10:02 a.m. in Wellington after dropping 1.5 percent yesterday after the earnings warning.

Forecast Payout

The company yesterday raised the forecast payment to its 10,000 farmer suppliers for the 2013-14 season to NZ$8.30 a kilogram of milk solids, up from NZ$5.84 a year earlier. It also intends to pay a dividend to farmers of 32 cents per share, unchanged from the 2012-13 year.

If achieved, the payout would be a record and may help to bolster the NZ$211 billion New Zealand economy.

“This is great news for the economy as the extra revenue equates to around 2.5 percent of GDP, meaning growth prospects for the year ahead have taken yet another step up,” ANZ Bank economists said in a note to clients today.

The central bank has said it will start raising interest rates from a record low next year as growth accelerates to 3.5 percent from 2.7 percent in the year through June.

Fonterra said sales fell 5.7 percent to NZ$18.6 billion while net income rose 18 percent to NZ$736 million.

Milk Collection

Collections from New Zealand farmers fell 2 percent to 1.46 billion kilograms of milksolids, “which hit our farmers and the business financially,” the company said.

Fonterra’s business in Australia, where it incurred NZ$45 million of restructuring costs, faced heightened competition for lower milk volumes and a continuing margin squeeze for consumer brands, Chief Executive Officer Theo Spierings said in the statement. Earnings in the combined New Zealand and Australia unit fell 37 percent.

“We expect the significant reshaping of our Australian operations, which is going to plan, will turn performance around,” Spierings said.

Fonterra yesterday said higher milk costs will make it more difficult to drive earnings growth in its consumer and foodservice businesses in the first half of this financial year.

“Prospects for the second half look more positive for Fonterra’s consumer businesses, but remain uncertain for NZ Milk Products,” it said in a statement.

Dirty Pipe

Fonterra said on Aug. 3 that a dirty pipe at a processing plant may have contaminated a whey protein used in baby formula with a botulism-causing bacteria. While government testing subsequently found the contamination didn’t pose a food safety risk, Fonterra undertook a review of its handling of the scare, which jeopardized New Zealand’s trade links with China.

China is New Zealand’s biggest dairy customer, buying NZ$3 billion worth of dairy products in the year through June.

“The subsequent all clear following further tests was a relief, but did not alter our view that the recall was the correct course of action at the time,” Wilson said today. “Fonterra cannot, and will not, take risks with food safety and the health of consumers.”

To contact the reporter on this story: Matthew Brockett in Wellington at mbrockett1@bloomberg.net

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net

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