Plummeting global dairy prices hurting: Fonterra's Rene Dedoncker

Processors were being squeezed between plummeting global dairy commodity prices and locked-in farmgate milk prices, Fonterra Australia managing director Rene Dedoncker said.

This would put pressure on already tight margins for Australian dairy processors.

Fonterra's overall business reported a massive 170 per cent jump in profit for 2022/23 to a record $NZ1.6 billion ($1.47 billion).

But its results released on Thursday, September 21, revealed the Australian arm had recorded a 65pc drop in profit, despite revenue growth.

But Mr Dedoncker said the normalised Earnings Before Interest and Tax (EBIT) for the Australian business were "pretty healthy" at $NZ102 million.

A one off-cost of $NZ27 million ($25 million) relating to the class action settlement agreement with Fonterra Australia milk suppliers in relation to the 2016 milk price clawback had cut EBIT to $NZ75 million ($69 million).

Mr Dedoncker said Australian farmgate milk prices were significantly higher than those in New Zealand.

But that was a reflection of the portfolio mix that milk from those two pools was used to produce.

About 95pc of NZ milk was exported, meaning it was at the "beck and call of the global dairy auction that happens every two weeks ago".

About 70pc of Fonterra's milk in Australia stayed here and was put into higher value products.

The price gap was also a reflection of the strong competition for milk, as Australian production continued to decline.

"The biggest one this year is security of milk and intensity around competition for milk led to higher prices back when we set the price," Mr Dedoncker said.

Australian processors had also been caught out by the need to set their opening prices by June 1 under the Dairy Code of Conduct.

Since setting those prices, global prices had plummeted.

"The total scenario that surrounds us now is very different from when we all set prices on the 1^st of June," he said

"That makes margins tight and there will be a squeeze right through the value chain."

Although the GDT price had bounced back in the last two auctions, there still needed to be significantly more recovery to get back to the June 1 level.

But Mr Dedoncker said Fonterra was still well placed - having made hard decisions in recent years to wind back some of its processing capacity.

It had also fractionally grown its share of the milk pool, holding on to 1.4 billion litres.

But importantly that amount of milk matched its assets and production.

"We don't want excess capacity and we don't want excess milk, you want to line up your demand with your milk supply, which we have been able to do," Mr Dedoncker said.

Mr Dedoncker acknowledged that the Dairy Code of Conduct had an influence on how farmgate milk prices were set in Australia.

Although the code allowed for step ups in milk price, these had occurred less often since its introduction.

Typically processors were taking more of a risk with opening prices, opening nearer to the closing price.

"This is where the code is challenging," he said.

"Because if that risk is too great and you put a price that is then difficult to earn it puts processors under significant pressure.

"And I don't think the intention of the code is to have processors under price pressure.

"But it does make it challenging because it is a minimum price."

This year was putting a lot of processors under pressure.

"So we've got to find a way to make sure farmers are making the right margin, that a consumer can afford to buy product at the end of the day, and in the middle, processors also have to make a buck and stay vibrant."

The code had brought benefits to processors.

Mr Dedoncker said the biggest benefit of the code was it gave farmers the security of a minimum farmgate price and it gave processors the security of supply.

"Security of supply is a ticket to the game," he said.

Mr Dedoncker said lower global commodity prices did mean imports into Australia - particularly cheddar - could be priced more competitively than the domestic product.

Fonterra is one of those importers itself, placing its NZ Mainland brand cheese and butter on supermarket shelves in Australia beside its Australian brands, such as Perfect Italiano and Bega.

Imports were more of a threat in the private label category.

Mr Dedoncker said the key for Fonterra in managing the threat from imports was to focus on strong brands and products that were functionally superior.

Consumers were facing cost-of-living pressures and some categories, such as health and beauty, had declined significantly.

But at this stage, consumers were staying with dairy, although they were looking to value options.

They key was to ensure families could use dairy products to put a reasonably priced meal on the table each night.

"But our job is to ensure we don't get caught out with that," Mr Dedoncker said.

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