Fonterra aims for $1bn cost savings as global dairy price slumps

‘This goal will help offset higher inflation expectations and we intend to achieve it through a range of projects that will streamline how we operate’

New Zealand dairy co-op Fonterra has announced plans to cut NZ$1bn in costs by 2030 as inflation and falling milk prices affect performance.

The move, which will involve job losses, was revealed in an email to farmer shareholders by CEO Miles Hurrell, according to reports in the New Zealand media.

Two new efficiency metrics are being put in place which will see the co-op report to shareholders every six months.

In the email, Hurrell said earnings had been good through 2023, leaving the co-op with a strong balance sheet, but there was a long-term need for “rigorous focus on where we allocate your milk and where we invest your cash”.

“We also know this means reducing our costs to assist us to hit our short-term and long-term targets,” he added. “For these reasons, since late last year we have been developing plans with an aim to reduce costs across the co-op by about $1bn over the seven years to 2030.

“This goal will help offset higher inflation expectations and we intend to achieve it through a range of projects that will streamline how we operate.

Miles Hurrell

“These projects include operational efficiencies, reducing cash costs across the business, and digitisation of business processes.”

Last month, Fonterra reduced its 2023/24 season milk price forecast from $6.25 – $7.75 per kgMS.

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“Global dairy trade (GDT) prices have fallen sharply since we released our opening forecast for the season in May,” said Hurrell, “with the overall index down 16% over that period.  

“While our wide forecast range assumed movement in GDT prices, whole milk powder prices fell 10.9% in the most recent trading event requiring us to revise our position again. 

“Reduced demand from key importing regions for whole milk powder is continuing to weigh on prices. While indications are demand will start to return over the second half of FY24, we do expect the pace of demand growth to be subdued relative to initial expectations.     

“In the meantime, we will continue to respond to market signals and adjust our forecast Farmgate Milk Price to ensure that the impact of current prices and currency movements is transparent.”

He added: “This is a challenging time for New Zealand’s dairy farmers and the co-op is doing all it can to support its farmers.”

Fonterra, which has opted for a new capital structure, releases its annual results in three weeks, followed by roadshow meetings with shareholders. Last year’s results were strong, prompting the co-op to rethink the sale of its Australia business, but it had taken a hit in some of its other overseas operations such as Sri Lanka.