New Zealand's Fonterra on Wednesday forecast a fall of up to 50 percent in full-year earnings and slashed its dividend, hurt by high input costs and operational constraints that have held it back from making the most of record high dairy prices.
The co-operative, which controls nearly a third of the world dairy trade, forecast earnings before interest and tax (EBIT) in the year to July 2014 of NZ$500 million-NZ$600 million ($415 million-$500 million), from NZ$1.02 billion in 2013.
Fonterra kept the price it pays farmers at a record high NZ$8.30 per kilogram of milk solids. But it cut its estimated dividend, which is paid to outside investors in its sharetrading fund as well as farmers, by 70 percent to NZ$0.10 a unit, knocking its share price.
New Zealand farmers have been enjoying record high prices for their milk on buoyant demand for whole and skim milk powder as countries like China import increasing amounts to manufacture infant formula and food products.
But higher farmgate prices have raised input costs for the company and Fonterra's milk powder plants have been struggling to process more milk into powder.
Fonterra had been using the "maximum possible volume" of raw milk to process milk powders, but the remainder was being processed into cheese which earns 26 percent less, said chief executive Theo Spierings.
"We have not been able to lift powder production above the current 70 percent level as we are limited by the nature of Fonterra's existing production facilities in New Zealand," Spierings said.
"That is why the remaining 30 per cent of milk is being converted to cheese and casein which are currently generating lower returns."
To increase its powder processing capabilities, Fonterra said it would invest NZ$235 million into a new milk powder plant, which would enable its North island Pahiatua plant to process an additional 2.4 million litres of milk each day.
The "abnormal circumstances" around the mismatch between milk powder and cheese prices had led to the dividend cut, the company said.
"It's interesting that they've cut the dividend outlook when it seemed they were looking to hold the dividend through the ups and downs of pricing and fluctuations in margins," said Con Williams, dairy economist at ANZ.
"It seems farmer shareholders perhaps have had quite a say in that ... It's quite clear that the farmers have won out today."
Shares in the Fonterra fund fell as much as 10 percent to their lowest price since it was launched last year but retraced some losses and were last at NZ$5.80.
The shares have been falling steadily since September on concerns that higher farmgate prices would weigh on earnings.
"I don't know if people believed they would cut the dividend ... so that was the biggest surprise," said Rickey Ward, head of equities at Tyndall Investment Management.
"That's why the share price has fallen heavily today."
Owned by about 10,500 farmers, the New Zealand milk co-operative, generates around 7 percent of the country's gross domestic product.
In August, Fonterra said it found a potentially fatal bacteria in one of its products, triggering recalls of infant milk formula and sports drinks in nine countries. The contamination was later discovered to be a false alarm.
