New Zealand dairy giant Fonterra has issued a profit warning for its 2019 financial year, blaming the drought in Australia and a slower recovery in some key sales markets for the drag on earnings.

Announcing third-quarter results this week, Fonterra said it had slashed its earnings forecast for 2019 to 10c to 15c per share – down from the previous forecast of 15c to 25c per share.

Struggling ingredients

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The company said its ingredients business in Australia was struggling due to weaker milk supplies caused by a severe drought in Australia this season.

As a result, Fonterra has lowered its profit (EBIT) forecast for its ingredients division to a range of $645m to $725m (€377m to €425m).

The previous profit forecast had ranged from $750m to $850m (€440m to €500m).

Additionally, Fonterra also lowered its profit outlook for its consumer and food service division from a range of $475m to $525m (€280m to €307m) to a lower range of $400m to $430m (€235m to €252m).

Business review

Fonterra chief executive Miles Hurrell said the senior management team in the co-op is continuing a wide-ranging strategic review of Fonterra’s entire business, which is due to be completed later this year.

“We’re on track to share our new strategy in September.

"In the meantime, we’re getting on and making decisions to reduce complexity and simplify our business so we can focus on where we have competitive advantages,” said Hurrell.

The co-op has too much capital tied up in these farms and is reviewing whether to offload them

Fonterra said it is reviewing its China Farms operations, where the co-op operates two wholly-owned farm hubs.

Hurrell said the co-op has too much capital tied up in these farms and is reviewing whether to offload them.

Fonterra’s China Farms comprises almost 35,000 cows set on 10 different farms and produced a cumulative 335m litres of milk last year.

The original aim of the China Farms hubs was to produce one billion litres of milk in China by 2018.

While it made a profit of €600,000 last year, Fonterra’s China Farms racked up losses in excess of €60m in 2015 and 2016, as the co-op struggled to gain a handle on production costs in China.

Brazil

Additionally, Fonterra said it is exploring options around the sale of its DPA Brazil business, which is a joint venture business with Nestlé that distributes chilled dairy products throughout Brazil.

Fonterra said it would decide on whether to sell its stake in the business by the end of 2019.

The co-op also announced that it will close its dairy ingredients plant in Dennington, Australia, resulting in the loss of almost 100 jobs.

Fonterra said the shrinking milk pool in Australia has resulted in excess manufacturing capacity in the Australian dairy industry, which forced the closure of the Dennington facility.

Milk price

Finally, Fonterra also announced that its final milk price for the current 2018/19 milking season was likely to be in the range of $6.30 to $6.40/kg of milk solids (25.4c/litre to 25.8c/litre).

This is at the lower end of the co-op’s last milk price forecast range.

For the 2019/20 milking season, Fonterra chair John Monaghan said the co-op was forecasting it milk price to range between $6.25 to $7.25/kg MS (25.2c/litre to 29.2c/litre).

“This is a realistic opening forecast. We are having to look out more than a year into the future which is difficult, but what the information available is continuing to show us is that demand remains strong across key trading partners and this is reflected in GDT prices,” said Monaghan.