Fonterra chief executive Miles Hurrell has written to farmer-shareholders to outline a plan to cut $1 billion of costs from the dairy cooperative over the next seven years.
The message, posted on the NZX sharemarket, does not say how many jobs are likely to be cut, but Hurrell said the ‘focus on efficiencies will have implications for staff numbers”.
Fonterra has cut its forecast for milk prices several times in the past few weeks, putting many of its farmer-shareholders under pressure, and Hurrell said that made the outlook for the rest of the year “even more challenging”.
“I acknowledge the pace and magnitude of these recent price changes has been unsettling,” Hurrell said in an update of the global dairy market and plans to cut costs to improve returns to farmers.
“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.
“These projects include operational efficiencies, reducing cash costs across the business, and digitisation of business processes.
“We plan to front load as much of this activity as possible over the next few years.”
Fonterra would introduce new efficiency measures farmers could use to track how well it was performing, Hurrell said.
He outlined the challenges and hopes for Fonterra in China, the world’s largest market for dairy.
“We’re hearing a lot about the China market right now, as a reduction in demand from China for imported whole milk powder has been one of the key drivers of falling prices.
“Strong domestic milk supply growth in China has been propelled by high raw milk prices over the past few years. More recently, China’s extended Covid-19 lockdown has reduced consumer demand for fresh milk products and this demand has not yet recovered to the previously forecast levels.”
This meant Chinese processors had been left with no choice but to spray dry their surplus milk, leading to high in-market stocks of whole milk powder.
But there were indications some rebalancing of China’s domestic milk production happening, he said.
As supply dropped from Chinese milk-producers, demand for New Zealand product could start to return over calendar year 2024, Hurrell said.
This coincides with the remaining tariffs on New Zealand dairy products being removed from January as part of the NZ-China Free Trade Agreement, he said.
Fonterra’s Greater China business was performing well, he said.
“China is still the world’s top market for dairy imports, and we believe imports will remain an important part of product mix for the foreseeable future.”
Hurrell said Fonterra now expected to collect less milk in the next few months, with its forecast milk collections for the 2023/24 season revised down from 1480 million kilogrammes of milk solids to 1465m kgMS.
“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 said.
In mid-August, Fonterra cut its milk price forecast for second time in a fortnight after global dairy prices plunged.
The co-operative said on August 18 that it expected to pay farmers between $6 and $7.50 per kgMS this season, down from its revised $6.25 to $7.75 per kgMS range announced a fortnight ago.
The $6.75 per kgMS mid-point, which farmers are paid off, is down from its previous forecast of $7 per kgMS, its opening forecast of $8 per kgMS in May, and its $8.20 per kgMS estimate for last season.
It is set to be the lowest payment since $6.35 per kgMS for the 2018/19 season.