Fonterra takes multi-million revaluation to Sri Lanka business as rupee tumbles

Sales volumes were also hit by global uncertainty around Covid and Ukraine but CEO Miles Hurrell says the financial performance remains solid

New Zealand dairy co-op Fonterra has seen its sales volumes hit by events around the world, including political uncertainty in Sri Lanka which toppled the value of the rupee.

In the his third-quarterly statement, CEO Miles Hurrell said: “The significant deterioration of economic conditions in Sri Lanka has seen the rapid devaluation of the Sri Lankan rupee against the US dollar.

“This means it takes more Sri Lankan rupee to pay for product purchased from New Zealand, which is sold in US dollars, and has resulted in an $81m adverse revaluation of our Sri Lankan business payables owing to New Zealand. This has been reflected in our normalised EBIT, which may continue to vary as Sri Lanka’s currency fluctuates.”

The global milk market – which has long been marked by volatility – has been rocked by events around the world, including fresh Covid lockdowns in China and the war in Ukraine, hitting Fonterra’s sales volumes for the nine months ending 30 April.

Miles Hurrell

“As an exporter, many of the markets we operate in have been prone to sudden shocks,” said Mr Hurrell, “which can impact what we sell, where we sell it and when, but right now we’re feeling the impact of multiple events across multiple markets.

“We are actively managing the challenges arising from Covid-19 and other geopolitical and macroeconomic events. However, increasing market volatility and uncertainty, ongoing supply chain disruptions and growing inflationary pressures have added increased complexity. 

“I want to thank our employees for delivering a solid financial performance despite the challenging global conditions, and also our farmer owners, sharemilkers and contract milkers who are managing increasing costs on-farm.”

He said the co-op’s global AMENA busines “continued to deliver a strong performance. Normalised EBIT was $406m, up 30% due to improved gross margins in our Ingredients channel, and a strong performance from our Chilean business.

“In Greater China, ingredients continued to benefit from increased sales of higher margin products. However, normalised EBIT was down 17% to $317m, due to continued pressure on our margins from the higher milk price, particularly in Foodservice, as well as the Covid-19 lockdowns. We also expect the impact of the lockdowns to show up in our fourth quarter results.

“Aside from some supermarkets, all restaurants and other food outlets were closed in Shanghai in early April to contain the Omicron outbreak. While restrictions have started to ease, a number of food outlets remain closed, while other cities across China are facing Covid-19 restrictions. The impacts of this, and the disruptions to supply chains, have been felt across the market and is reflected in our Greater China sales volumes which are down on the same time last year.”

But, he added, the outlook is still positive with the opening forecast Farmgate Milk Price for the 2022/23 season is set at $8.25 – $9.75 per kgMS, with a midpoint of $9 per kgMS. 

Mr Hurrell says this reflects strong demand for dairy coupled with constrained global supply. 

“On the supply side, growth from key milk producing regions is expected to remain constrained as high feed, fertiliser and energy costs continue to impact production volumes. These demand and supply dynamics are expected to support dairy prices in the medium to long-term.

“However, we are operating in an increasingly volatile global environment and are managing a wider range of risks than usual.

“This includes the potential for further impacts from Covid-19, financial markets and foreign exchange volatility, global inflationary pressures, a tightening labour market, increasing interest rates, geopolitical events, as well as the possible impact on demand from higher dairy prices.

“This is why our 2022/23 forecast range is so wide at this point in the season.”

For the 2021/22 season, Fonterra has maintained its 2021/22 forecast Farmgate Milk Price of $9.10 – $9.50 per kgMS.

Total Group normalised EBIT was $825m, down $134mn reflecting lower sales volumes, continued pressure on margins from the significantly higher milk price, and uncertain global events. Fonterra’s Normalised Profit After Tax fell down $131m to $472m.

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