Fonterra issues 2014 profit warning citing dairy price drop

08-Sep-2014 - Last updated on 09-Sep-2014 at 14:19 GMT

Fonterra expects its 2014 operating profit, impacted by falling global dairy prices, to come in at the "lower end" of its forecast.

In its latest Global Dairy Update, published on the New Zealand Exchange (NZX) earlier today, Fonterra said earnings before interest and tax (EBIT) would likely fall closer to NZ$500m (US$413m, €320m) than NZ$600m (US$495m, €384m) as a result of the fall in global dairy prices.

The Global Dairy Trade Platform (GDT) price index, calculated from the total quantity sold in all auctions, dropped 45% February 2014 and September as global demand lags and supply increases.

“The cooperative wishes to reconfirm its earnings guidance range for the financial year 2014 of NZ$500m to NZ$600m EBIT," said the report.

"However, expectations are EBIT to be at the lower end of this range due mainly to the adjustment to the value of Fonterra’s year-end inventory.”

“This reflects a significant reduction in global dairy prices with the GDT.”

The profit warning comes less than two weeks in advance of Fonterra's September 24 full-year results and just weeks after it knocked a dollar off its farm gate milk price (FGMP) forecast.

In July 2014, Fonterra reduced its FGMP for the year NZ$7.00 (US$5.96, €4.44) per kg of milk solids (kgMs) to NZ$6.00 (US$5.11, €3.80) per kgMs.

Commenting at the time, Fonterra chairman John Wilson attributed the revision of its FGMP to continuing price volatility.

Based on an earlier milk supply forecast for the season of 1.616bn kgMs, the FGMP revision represents a collective drop in payments to Fonterra suppliers of around NZ$1.6bn (US$1.36bn, €1bn).