Fonterra, the world's largest dairy exporter, plans to increase dividends paid to farmers to maintain its market share in New Zealand. The company announced in Wellington that it had raised its dividend policy from an average of 50% of earnings up to 2023 to 60-80% of earnings. Additionally, it aims to increase its target return on capital from an average of 8.6% to 10-12% and continues to enhance milk prices paid to farmers.
The company is taking steps to reverse the decline in milk production, which has dropped by over 6% in three years, reaching 16 billion liters for the 2023-24 season. This decline is attributed to changes in land use (such as converting to forestry) and the emergence of new competitors. The number of dairy farms supplying its New Zealand factories has also decreased.
Fonterra believes it can retain and attract farmers by offering the highest possible dividends and milk prices, along with using advance payments to improve their cash flow. Last week, Fonterra forecasted that the milk price for the 2024-25 year could be NZD 9 per kilogram of milk solids, up from NZD 7.83 last season.
The updated strategy shifts focus to the company’s ingredients and food services business, seen as future profit drivers. Fonterra reiterated that it does not consider itself a natural owner of consumer businesses and continues to explore options for this sector, including divestiture.
CEO Miles Hurrell noted that the increase in cooperative earnings is mainly due to higher ingredient and food service earnings, along with improved operational efficiency. Should Fonterra divest its consumer business, it plans to bring significant capital returns to shareholders.
Fonterra aims to strengthen partnerships with strategic ingredient customers like Nestle and Mars, while also increasing production capacity for high-value nutritional powders and milk-derived proteins.
In its food services business, Fonterra plans to expand into more Chinese cities and grow its presence in Southeast Asia, where demand for cream cheese, UHT cream, and mozzarella is rising.
The strategy also includes developing more innovative foods using robotics, automation, and artificial intelligence, while continuing to enhance the efficiency of its manufacturing plants.
