Announcing results for the year ended 31 July, Fonterra saw a 65% increase in net profit after tax to $834m (€545m) for the financial year ended 31 July 2016, despite the downturn in dairy markets.

Volumes increased 4% to 23.7bn litres, despite reduced stocking rates and less supplementary feeding. Milk collection across New Zealand declined last season by 3%.

The lower global dairy commodity prices hurt revenues by 9% and fell to $17.2bn (€11.2bn). Debt reduced by $1.6bn (€1bn) to $5.5bn (€3.6bn).

The ingredients business performed well against the backdrop of a difficult markets. Profits (EBIT) in the division increased 24% to $1.2bn during the year, while ingredients stocks were down 25%.

The consumer and foodservice business processed an extra 380m litres, bringing total volumes in this business up to 4.9bn litres. The group said there was strong growth in foodservice, which helped boost profits (EBIT) in this division by 42% to $580m.

Fonterra has focused on transforming its business over the past number of years, away from a concentrated commodity powder player, to moving more milk into higher-returning consumer and foodservice products.

The focus of this strategy is to secure higher ingredients margins over Global Dairy Trade (GDT) benchmarks.

The co-op has also focused on becoming more efficient. In the past year it has cut its operating expenses, increased its free cashflow, reduced its working capital days, driven debt down, and reduced its capex and gearing.

This, combined with higher earnings and margins, has boosted return on capital from 8.9% to 12.4%.

The co-op is paying a cash payout of $4.30 for the 2016 season for a 100% share-backed farmer, comprising a farmgate milk price of $3.90/kg milk solids and a dividend of 40c/share.

Future outlook

The co-op gave a positive signal to dairy farmers for the coming season. It said that while global milk prices are still unrealistically low, there are signs of improvement.

To reflect the improvement in global markets, it increased its forecast milk price for the 2016/17 milking season by 50c to $5.25/kg milk solids. This is the second time in less than a month that Fonterra has increased its milk price outlook for the year ahead after it raised its initial forecast from $4.25/kg to $4.75/kg.

When dividends from the co-op are included, Fonterra said that its farmer suppliers can expect to earn a total average payout of $5.75 to $5.85/kg for the year ahead, which is very close to the estimated average cost of production in New Zealand at $6/kg.

Fonterra chair John Wilson said the co-op had reviewed its forecasted milk price upwards in response to falling milk production in the EU and New Zealand combined with stable demand.

The news of this latest milk price increase from Fonterra comes just hours after the GDT returned its fourth consecutive positive result, with average prices lifting a further 1.7% at this week’s auction.

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GDT rises again as Fonterra lifts milk price forecast