AUCKLAND: Fonterra Cooperative Group, the world’s biggest dairy exporter, is bracing for supply chain disruptions as the Middle East conflict begins to disrupt shipping and cause delivery delays in the region.
It is taking longer for ships to get to the Gulf region and sometimes port closures have meant product hasn’t reached the correct destination and has required land transport, chief financial officer Andrew Murray said in an interview yesterday.
“If it continues for a reasonable period, you may end up having a knock-on effect on global shipping and that will be difficult,” he said. “But at the moment it’s constrained relatively to the actual Middle East destinations.”
The risk of prolonged supply chain disruption, which could lead to shortages of containers or ships on routes to New Zealand, may lead to increased inventory and higher costs.
Any impact from the war on global economic growth may have flow-on impacts for commodity prices, something Fonterra is used to handling.
“We have a business that is designed for volatility because commodity markets move in cycles,” said Murray.
“We know how to deal with volatility and at the moment we feel comfortable. However, a prolonged conflict will start to have knock-on effects for sure.”
The potential turmoil comes as Fonterra completes the US$2.4bil sale of its consumer unit to Lactalis and commences a new strategy focusing on producing higher-value ingredients from New Zealand milk.
The Auckland-based company yesterday reported first half net income of NZ$750mil (US$437mil) from revenue of NZ$13.9bil.
First half normalised earnings from continuing operations, excluding the consumer unit, were 35 New Zealand cents a share, and are expected to be 50 to 65 cents in the full year, up from previous guidance of 45 to 65 cents.
While second half sales volumes are expected to lift, first half earnings are usually better than the second six months due to milk flows. The company is also wary of rising input costs, such as the cost of milk, which may put pressure on margins, Murray said.
Fonterra raised its forecast milk payment to farmer shareholders to NZ$9.70 per kg of milksolids, from NZ$9.50, citing recent lifts in global prices, but said commodity prices are likely to be volatile in the six months through July.
Shareholders will receive a 24-cent share dividend, topped up with a 16-cent special dividend reflecting the earnings of the consumer unit that has been sold. Owners will also get a NZ$2 a share capital return from the proceeds of that sale.
All three distributions will be made on April 14, effectively a NZ$3.9bil injection into the rural economy. Murray said farmers will likely use the proceeds to reduce debt but some may invest in more land or equipment.
“We’ll probably see a mix of a debt reduction and people investing for the future of farming,” he said.
“There is a desire for people to grow and some farmers will use that to maybe buy another farm or to grow their own space. We’re certainly seeing that.” — Bloomberg
