Fonterra abandons plans to sell Australian operation, upbeat about future as milk supply stabilises

The co-op announced last year it was reviewing its ownership of its Australian operation, as part of a new direction focusing on delivering maximum value for NZ milk and to free up capital.

But its chief executive officer Miles Hurrell when announcing the co-op's annual results on Thursday said Fonterra had looked at "a number of options for our Australian business".

"(We) have decided that it's in the co-op's best interests to maintain full ownership," he said.

"Australia plays an important role in our consumer strategy with a number of common and complementary brands and products and as a destination for our NZ milk solids.

"The business is going well, and it will play a key role in helping us get to our 2030 strategic targets."

READ MORE: Chunk of Fonterra Australia may hit the market

Fonterra announced a 4 per cent increase in total group normalised earning before interest and tax (EBIT) to $NZ991 million ($A872 million), on the back of an 11pc lift in revenue to $NZ23.4 billion ($A20.59 billion).

This allowed it to pay a record farmgate price of $NZ9.20 ($A8.18/kg MS) to farmers, as well as a $NZ0.20 ($A0.17) per share payment to farmer owners and unit holders.

Mr Hurrell said despite the challenges, including increased costs associated with supply chain volatility, 2021/22 was a good year for the co-op.

"These results demonstrate that our decisions relating to product mix, market diversification, quality products and resilient supply chain mean the co-op is able to deliver both a strong milk price and robust financial performance in a tough global operating environment," he said.

Fonterra Australia managing director René Dedoncker said the decision to not sell off the Australian business was validation that it was on strategy.

"We play a critical role both in strategy and performance and so we now have the ability ... to just keep performing and deliver the expectations that the co-op has, so we we feel pretty good about that," he said.

The Australian business served global markets and had a big play in the consumer market, which aligned with the co-op's strategy.

The Australian operation also complemented the NZ milk pool.

Mr Dedoncker said the Australian business had been performing well for the past four years.

"We've made a consecutive commitment to grow the relationship with farmers and and to make sure that we're meeting every promise that we make and at the same time to build a profitable business that can earn and pay a competitive farmgate milk price and a shareholder return," he said.

"So every year we've seen a lift in our earnings, we've seen a lift in a our connection with farmers."

This had allowed the Fonterra to grow its share of the shrinking Australian milk pool.

Fonterra had attracted new suppliers this season, allowing it to grow its milk pool by 5pc.

It had retained 90pc of existing suppliers, and although most were not growing milk production, the stability had helped the business.

Mr Dedoncker pointed to the value it offered suppliers through its Farm Source services, delivering things such as farm environmental plans and agronomy advice, as the key to retaining suppliers.

A competitive milk price was also critical.

"The milk prices are circa 25pc up year on year, so that reflects the margin that we need to keep and maintain on farm," he said.

"Price is interesting but really this is a margin story - are farmers making enough, are we making enough.

"The competition exists and I think it is good for the industry, but there is also some challenges now around the fact the milk pool is stable, so how do you continue to thrive and survive .. when you don't have growth milk."

READ MORE: Dairy insider says Australia is transforming from a major dairy exporter to an importer

Mr Dedoncker said Fonterra was ahead of some of its rivals in that it had made the hard decisions about assets several years ago.

"We made that tough call around Dennington, that we would shrink from six primary sites to five," he said.

"That really set us up for where we are today right.

"And what that means is that our our milk and our assets that we have are really efficient, they're focused on the strengths that we've got in consumer and foodservice and ingredient partnerships."

This had meant the company had also been able to invest in new secondary processing sites.

Mr Dedoncker said the business was still seeing some of the positive benefits from the swing to home consumption of quality dairy products during the COVID-19 lockdowns.

"Demand stayed high, so we actually have a higher market share in our in home business and that's despite the fact that the out-of-home world's opened up," he said.

But the pandemic is still creating problems for the global business, particularly with continuing lockdowns in the key Chinese market.

Mr Hurrell is hopeful about 2022/23.

"The longer-term outlook for dairy remains positive," he said.

"And in the medium-term, we expect to see an easing in some of the geopolitical events, namely the COVID-19 lockdowns in China and the economic challenges in Sri Lanka."

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