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Aus faces down NZ milk giant

New Zealand dairy cooperative Fonterra has posted a 16 per cent drop in first-half profit as Australian dairy producers prepare to challenge the Kiwi exporter’s dominance in China.

The world’s biggest dairy exporter affirmed the forecast payout for the current season at $NZ4.70 per kilogram of milk solids, down from a record $NZ8.40/kgMS last season.

The news comes as Australian dairy producers prepare to exploit the burgeoning dairy market in China, ahead of the activation of a free trade agreement with the Asian superpower.

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The FTA will considerably lower tariffs on Australian exports, bringing prices down and making the Australian products more competitive. It was signed in November 2014 and is set to take effect this year.

New Zealand signed a free trade deal with China in 2008, and since then its dairy exports to China have skyrocketed. Australia’s dairy exports to China have remained flat by comparison.

But with China’s burgeoning demand for becoming the norm, other milk exporters are catching with New Zealand. Fonterra, which exports milk on behalf of the vast majority of dairy producers in NZ, is taking a hit. It trimmed guidance for dividends to a range of NZ20 cents to NZ30 cents, from a previous NZ25 cents to NZ35 cents.

Net profit fell to $NZ183 million ($A177.89 million) in the first half, as sales declined 14 per cent to $NZ9.7 billion.

Chairman John Wilson said not only were conditions tough but it was also having to generate profit on inventory made in the previous financial year when the cost of milk was higher and sold in the first quarter of the current year, when global dairy prices were falling.

“These first-half results are below our farmers’ expectations, in a period when the farmgate milk price is low and we are reducing the forecast dividend range,” Mr Wilson said.

“Oversupply from dairy producing regions around the world in the early months of the financial year saw the trade-weighted GlobalDairyTrade price index hit a five-year low in December,” he said.

“Supply outweighed demand and buyers undervalued milk, which was reflected in prices that declined to unsustainable levels. Lower commodity prices placed downward pressure on our farmgate milk price in the first half.”

A partial offset was a benefit from the decline in the New Zealand dollar, which helped add about NZ30 cents/kgMS to the forecast farmgate milk price, as at January 31, he said.

Fonterra didn’t give a forecast for full-year earnings, with chief executive Theo Spierings saying the company has “a single-minded focus on delivering results; increasing sales volumes, reducing complexity and taking costs out to maximise returns”.

“This will require some tough decisions,” Mr Spierings said. “We are committed to improving performance.”

– with AAP

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