Fonterra aims for $1b cost savings as inflation, dairy price dive bite into targets

Dairy juggernaut Fonterra is developing plans to cut costs by around $1 billion out to 2030 as a slump in global dairy prices and inflation threaten its short and long-term targets.

In an email to
its 8000 farmer-owners posted on the NZX, the chief executive of New Zealand’s biggest business, Miles Hurrell, said while the co-operative had delivered good earnings in FY23 and had a strong balance sheet, achieving its long-term targets depended on “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.”

The plans, which had been in train since late last year, included operational efficiencies, reducing cash costs across the business and digitisation of business processes.

The focus on efficiencies would have implications for staff numbers, “but we don’t want those to be at the expense of driving value growth”, Hurrell said.

The co-operative had also revised down the volume of milk it would collect in the current 2023-2024 season.

The anticipated volume has fallen from 1480 million/kg milk solids to 1465m/kg.

“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,” Hurrell said.

Fonterra planned to “front load” as much of its cost saving projects as possible over the next few years, he said.

“This work has been under way for some time, with cost reduction and business simplification activities already delivered or in progress through the FY23 and FY24 business plans.

“To track our progress, we are introducing two new efficiency metrics which we’ll report against every six months.

“These are: Opex per kg milk solids – targeting a 4 per cent cash operating cost improvement per year to support long-term discipline in our global overheads; gross profit per kg milksolids – targeting a 2 per cent New Zealand cash manufacturing cost improvement every year to support efficient New Zealand operations while remaining laser focused on delivering value.”

Hurrell said he recognised many farmers were under pressure and Fonterra’s two recent downgrades to forecast farmgate milk price for the current season has made the outlook for the year “even more challenging”.

“It’s regrettable to have had to make revisions of this magnitude early in the season. While we rely on market information we have at the time, I acknowledge the pace and magnitude of these recent price changes has been unsettling.”

He offered insights into what Fonterra was seeing in the market.

“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.

“Chinese processors have been left with no choice but to spray dry their surplus milk, leading to high in-market stocks of whole milk powder. There are reports of some rebalancing of China’s domestic milk production occurring. As these changes on the supply side play out, indications are demand for New Zealand product could start to return over calendar year 2024.”

He said that coincided with remaining tariffs on New Zealand dairy products being removed from January 2024 as part of the NZ-China Free Trade Agreement.

Overall, demand for dairy in China has continued to grow, he said, just at a slower pace more recently.

“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. We will continue to watch these market dynamics closely and will update you promptly if there are any changes in the outlook for the farmgate milk price as a result.”

Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.