New Zealand’s largest milk processor, Fonterra, racked up after-tax losses of NZ$196m (€110m) for its 2017-18 financial year to the end of July.

The world’s largest processor reported a 22% decline in earnings (EBIT) to NZ$902m (€508m), while net debt in the business increased 11% in the year to NZ$6.2bn (€3.5bn).

This leaves the business highly leveraged with a net debt to earnings ratio of 4.5 times.

Sales for the year increased by 6% to NZ$20bn (€11.5bn), although sales volumes were down 3% in the year.

The principal reasons for the heavy financial losses are a result of two exceptional charges against the dairy co-op, including a once-off €106m payment to Danone and a NZ$405m (€230m) write down of the value of Fonterra’s investment in an 18% shareholding in Beingmate, the Chinese infant formula company.

However, excluding these exceptional charges, underlying profits in Fonterra still collapsed by more than half (-51%) to NZ$382 (€215m), illustrating the deeper lying problems in the business.

Mile Hurrell, who was recently appointed as the new chief executive at Fonterra, said there were four main reasons for this decline in profits.

“First, forecasting is never easy but ours proved to be too optimistic. Second, butter prices didn’t come down as we anticipated, which impacted our sales volumes and margins. Third, the increase in the forecast Farmgate Milk Price late in the season, while good for farmers, put pressure on our margins. And fourth, operating expenses were up in some parts of the business,” said Hurrell.