Fonterra financial woes weigh on Aussie future

Fonterra's financial woes weigh on the future of its Australian arm

Dairy
FONTERRA FINANCIALS: Fonterra's financials may have been postponed but there is no holding back the views of banks and credit agencies on its Australian outlook.

FONTERRA FINANCIALS: Fonterra's financials may have been postponed but there is no holding back the views of banks and credit agencies on its Australian outlook.

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Fonterra's financial woes weigh on the future of its Australian arm.

Aa

In the vacuum created by the postponement of Fonterra's financial results by a fortnight, experts have begun to weigh in on its future in Australia.

Credit rating agency S&P Global Ratings has maintained the dairy giant's credit rating despite Fonterra's recent announcement that its global business expects to make a NZ$590-675 million loss this year.

But there was a warning for Australia from S&P Global Ratings analyst Graeme Ferguson.

"We assess Fonterra as having higher debt capacity because milk payments to its New Zealand supplier base are effectively subordinated to payments to other creditors," Mr Ferguson said.

While he noted suppliers outside NZ were not members of the cooperative, Australian farmers hadn't forgotten local farm-gate price step downs.

The cooperative had "somewhat lost its way" with an "ambitious capital investment program that sought to grow Fonterra beyond its core function of collecting, processing, and selling NZ milk," according to Mr Ferguson.

Asked to clarify the implications for the local arm, he said the Australian business continued to be "a drag on Fonterra's results".

"Severe drought conditions and intense competition have weighed on milk collection, prompting Fonterra to close its Dennington plant," he said.

"A speedy turnaround of Fonterra's Australian operations appears unlikely, so perhaps more significant changes might be contemplated as part of the portfolio review that is currently underway."

Federated Farmers of NZ national vice president Andrew Hoggard said last month the importance of Fonterra's Australian arm was unclear.

"To be bluntly honest, it will depend on their strategy going forward, that's going to be what determines whether or not Australia is relevant," Mr Hoggard said.

"The feeling I get is that the focus is going to be on selling NZ milk to the world and they've gone away from the idea of being the globally relevant, dominant player and the whole milk pool strategy."

READ MORE: Fonterra Australia write down

READ MORE: Fonterra delays results announcement as share price and production continue to plummet

Fonterra last month flagged asset write downs totalling NZ$820-860m that reduced the value of its Australian ingredients business by NZ$70m.

ANZ agriculture economist Susan Kilsby predicts more write downs totalling NZ$300-700m, including NZ$100m for the Australian ingredients business.

"Fonterra's Australian business has two separate parts - the milk collection and processing part of the business and the sale of consumer goods," Ms Kilsby said.

"The consumer goods side of the business is reported to be performing admirably but Fonterra's Australian milk collection business is under pressure."

While national milk production declined 5.7 per cent last season, Fonterra Australia's milk collection fell by 20.3pc and has continued to drop.

Since April, it collected 30pc less than the same period 12 months before.

Fonterra will release its results on October 26.

The story Fonterra financial woes weigh on Aussie future first appeared on Stock & Land.

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