Fonterra has cut its forecast New Zealand 2018-19 farmgate milk price, on the back of a reduction in profits.
The company also signalled that it is cutting back on its global operations and prioritising its New Zealand milk supply.
But its forecast for 2019-20 prices was optimistic, with an opening NZ farmgate price range of $NZ6.25-$NZ7.25 a kilogram milk solids.
The reduction in the 2018-19 price to $NZ6.30-$6.40/kg MS surprised pundits, who had been expecting a lift in light of recent Global Dairy Trade auction results.
NZ bank ASB's senior rural economist Nathan Penny said overall dairy auction prices, including whole milk powder prices, had lifted by about 5 per cent since Fonterra's last update in February.
The NZ dollar had also fallen against the US dollar.
Mr Penny said Fonterra's corporate performance continued to disappoint.
The company revised its 2018/19 forecast earnings to 10 to 15 cents per share, down from 15-25 cents per share.
It also reported its profit was down 9pc, despite increases revenue and sales volumes.
Fonterra's chief executive Miles Hurrell acknowledged that farmers and unit holders wanted a decent return on their investment.
He said good progress was being made on the company's strategy review, including simplifying the business to focus on areas of competitive advantage.
But this could create some fluctuations in earning in the next couple of years.
Fonterra was making changes in its global operations, including:
- A strategic review of its two wholly-owned farm hubs in China.
- A review in conjunction with its partner Nestle of the Dairy Partners America Brazil joint venture.
- The closure of the Dennington, Vic, factory in Victoria.
"These decisions relate to our new strategic direction in particular, prioritising our New Zealand milk supply and simplifying our global portfolio, which, as we have said previously, requires us to review every part of business to ensure it meets the needs of the co-op today," Mr Hurrell said.
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Fonterra's Australian business continued to face challenges.
"The Australian ingredients business continues to feel the impact of drought and other significant changes that mean there is excess manufacturing capacity in the Australian dairy industry," he said.
"This is not a one-off for this season, it's the new norm for the Australian dairy industry and we need to adapt.
"We need to get the most value from every drop of our farmers' milk and, with the reduced milk pool in Australia, we must put it into our highest returning products and most efficient assets.
"Dennington is over 100 years old and not viable in a low-milk pool environment."
This story first appeared on Australian Dairyfarmer