A Russian ban on farm and dairy imports has sent dairy prices spiraling, but the CEO of the world’s largest dairy producer expects conditions to normalize by March.
The U.S. and European Union have taken various sanctions against Russia following its annexation of Crimea in March and its support of pro-Russian separatists in the region. Russia retaliated in August, banning a range of farm imports from the EU and U.S. Coupled with pent-up milk inventories in China, the ban sent global dairy prices down 44 percent year to date.
«There are so many geopolitical issues around the world that are affecting demand at this point in time that prices have dropped to where they are, [but] I believe that the situation around dairy will strengthen,» said Theo Spierings, chief executive officer of Fonterra.
«We are a bit stronger in our forecast than other people because we believe dairy commodities will come back to normal levels sometime around March next year,» he added.
While Fonterra does not export directly to Russia, the import ban’s impact on the global dairy scene is hurting the company, Spierings said. Russia’s ban on European cheese imports is problematic, as the demand for New Zealand milk, which is used in the production process, has fallen dramatically.
«A third of New Zealand’s milk pool… needs to find a home. That is affecting the global trade scene tremendously,» he added.
On Tuesday, Fonterra cut its milk price payout forecast to a six-year low of NZ$5.30 ($4.28) per kg of milk solids from NZ$6 – the amount it pays its farmer shareholders for raw milk – citing increased supply in Europe and slowing demand from China.
Weak demand saw Fonterra’s profits fall 76 percent for the fiscal year ending in July 2014, and further volatility is expected in the near term. Fonterra, New Zealand’s largest company, is pivotal to the country’s economic performance.
Fonterra’s outlook for the second quarter of fiscal 2015 is brighter, however, on expectations for improved margins in its consumer and food service businesses.
China business
Fonterra entered an alliance with Chinese baby-milk maker Beingmate Baby & Child last month, which will include the dairy exporter buying a 20 percent stake in the firm.
The deal is not complete yet, but Spierings said the partnership will be crucial to the firm’s revenue growth in the world’s second largest economy.
«I believe partnerships and building local fresh milk farms is going to be a requirement if you want to develop business in China,» he said.
Fonterra’s relations with China soured last year, when the conglomerate recalled 1,000 tons of its dairy products across seven countries after safety tests identified a bacterial strain that could cause botulism – a dangerous form of food poisoning.
China, which imports most of its powdered milk from New Zealand, enforced a temporary ban on the import of the ingredient from the country.
Source: CNBC