Fonterra CEO Miles Hurrell has written to farmer-shareholders outlining a strategy to slash $1 billion from the dairy cooperative’s expenditures over the next seven years.
The letter, which was posted on the NZX sharemarket, does not specify how many positions would be lost, but Hurrell said that the “focus on efficiencies will have implications for staff numbers.”
Fonterra has dropped its milk price prediction numerous times in recent weeks, putting many of its farmer-shareholders under pressure, and Hurrell said this made the balance of the year “even more challenging.”
“I acknowledge that the pace and magnitude of these recent price changes has been unsettling,” Hurrell said in a report on the global dairy market and initiatives to lower costs to enhance farmer profits.
“We have been developing plans since late last year with the goal of reducing costs across the co-op by about $1 billion over the next seven years to 2030,” Hurrell said.
“We intend to achieve this goal through a variety of projects that will streamline how we operate, and it will help offset higher inflation expectations.”
“These projects include operational efficiencies, cash cost reductions across the business, and business process digitization.”
“We plan to front-load as much of this activity as possible over the next few years.”
Hurrell said that Fonterra will use new efficiency measurements that farmers could use to assess how well the company was functioning.
He discussed Fonterra’s problems and expectations in China, the world’s biggest dairy market.
“Right now, we’re hearing a lot about the China market, as a drop in demand from China for imported whole milk powder has been one of the key drivers of falling prices.”
“High raw milk prices have fueled strong domestic milk supply growth in China over the last few years.” More recently, China’s lengthy Covid-19 blockade has lowered consumer demand for fresh milk products, which has yet to rebound to previously predicted levels.”
As a result, Chinese processors were forced to spray dry their excess milk, resulting in significant in-market supplies of whole milk powder.
However, there were signs of a rebalancing of China’s domestic milk output, he noted.
Hurrell believes that when supply from Chinese milk producers falls, demand for New Zealand milk will begin to rise in calendar year 2024.
This aligns with the removal of residual duties on New Zealand dairy goods as part of the NZ-China Free Trade Agreement, he added.
He said that Fonterra’s Greater China business was doing well.
“China is still the world’s top market for dairy imports, and we believe imports will remain an important part of the product mix for the foreseeable future.”
Fonterra now expects to collect less milk in the coming months, with its estimated milk collections for the 2023/24 season reduced from 1480 million kilogrammes of milk solids to 1465 million kilogrammes of milk solids.
“Wet weather has impacted pasture cover and quality, and while we could see some improvement in these conditions as we head into Spring, we expect inflationary pressures and the Farmgate Milk Price outlook to continue to impact milk production levels,” he added.
Fonterra dropped its milk price prediction for the second time in a fortnight in mid-August, after a drop in global dairy prices.
On August 18, the co-operative said that it expects to pay farmers between $6 to $7.50 per kgMS this season, a decrease from the revised $6.25 to $7.75 per kgMS range released a week earlier.
Farmers are paid $6.75 per kgMS, a decrease from the prior expectation of $7 per kgMS, the opening forecast of $8 per kgMS in May, and the $8.20 per kgMS estimate for last season.
For the 2018/19 season, it is expected to be the lowest payout since $6.35 per kgMS.
