Landcorp forecasts loss of up to $12 mln

Rural News

State owned farming business Landcorp downgrades annual result forecast after slipping to $8.9 mln operating loss in December half-year

3rd Mar 16, 11:55am by David Hargreaves

State-owned Landcorp Farming's now forecasting an operating loss of between $8 million and $12 million in the year to June after slipping to a net operating loss of $8.9 million for the December half-year.

The loss compared with a $1 million profit in the corresponding period last year.

Landcorp’s half year revenues were $108.8 million (down from $115.1 million), due predominantly to a 22% cent contraction in milk revenue in the corresponding period.

The company said its participation in the Fonterra Guaranteed Milk Price (GMP) scheme had reduced the revenue impact of lower milk prices .

"Lower milk revenue has also been partially offset by continuing strong performance in our red meat business," the company said.

For the June 2015 year Landcorp's annual operating profits plunged over 83.5% to $4.9 million in the face of sharply declining milk prices and lower returns on lamb. No dividend was paid.

In its Statement of Corporate Intent (SCI) for this year, Landcorp forecasted a net operating loss of $9.6 million. However, in December the company updated this and said it expected an operating loss of just between $1 million and $6 million, following the then upward revision in Fonterra’s forecast milk payment to $4.60 per kg of milk solids. More recently, however, Fonterra's lowered that forecast to $4.15 and many economists doubt it will even make that.

Landcorp said its new expectation of a net operating loss of between $8 million and $12 million largely reflects the recent downward revisions to forecast milk payments for the rest of the season.

"This forecast assumes there will be no adverse weather conditions; no deterioration in foreign exchange rates; and that current market prices hold through the season."

The company has been reducing the size of its dairy herd and milk volumes, considering other uses for the Wairakei Estate land it leases north of Taupo and which it has been converting to dairy from forestry, using technology to cut costs, and exiting its sharemilking contract with Chinese partner Shanghai Pengxin to focus on developing higher value products.

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9 Comments

by Andrewj | 3rd Mar 16, 12:18pm 1456960734

Wonder what the, 'other considerations' for Wairaki estate would be, forestry perhaps? My understanding was the leases were long term, no lease costs for the first term to cover development costs and then market rates, 10+10+10 year leases was the rumour. I bet they would love to find a way out, it just comes down to the money.

Like I have been saying for a few months, these guy's bet the farm and lost, 65,000 cows all losing $2 a milk fat solid producing 380 kg's per cow, add in the sheep industry in collapse and someone is sitting on a bomb.

by Belle | 3rd Mar 16, 1:06pm 1456963619

I think they are fencing it up for dairy grazing Aj. Just as well landcorp jumped on the GMP the last two seasons. Wondering how much worse it has made the payout for other coop members. And are the market commentators taking it into account when they guesstimate their payout predictions.

by Andrewj | 3rd Mar 16, 1:16pm 1456964190

Over %1 of Fonterra milk comes from Landcorp, so yep they made a good move.

Maybe a wink and a nudge, nudge from the right people, perhaps thats what happened when they secured their water take from the Waikato river

by Henry_Tull | 3rd Mar 16, 3:17pm 1456971462

Depends on what the 2 shareholders will let em away with.

by Casual Observer | 3rd Mar 16, 6:19pm 1456982375

Belle, one of the most commonly misunderstood things about GMP is that Fonterra made good money from GMP and that went in to the coffers of ALL suppliers. One needs to remember the first year they brought in GMP those suppliers who took it up LOST $1.40kg/ms by taking it up. We didn't hear the rank and file saying it was 'not in the cooperative spirit' then. If we use your comment above - how much better did the loss making GMP suppliers make it for those suppliers who didn't take it up in that first year?

by Belle | 3rd Mar 16, 7:28pm 1456986505

I dont have an opinion on it myself CO. What do you think? I think the meat coops do similar with contract lamb and beef. I do remember a time I think SFF came out with a contract. Then reneged. Lol. Oh so typical.

by Casual Observer | 4th Mar 16, 12:30pm 1457047807

IMO Belle, it all depends on what an individuals view of what 'cooperative' means. Some argue it should be that everyone receives the same for their product (whether that be milk or meat etc). That wasn't around even in the days of DairyNZ when we were town milk farmers - we were paid handsomely for our milk in comparison to the seasonal suppliers. No one complained then it wasn't in the 'cooperative spirit'.

GMP came about because some (big) customers were wanting some certainty of price for specific products. Fonterra was able to calculate approx how many kgs they would need to meet those requests and offered it at a GMP to suppliers - which was never higher than the milk price at the time the GMP offer was open. So the farmers taking GMP took the risk of losing out potential income if the milk price went up. What it did allow the farmers to have was certainty of income over a set amount of production (whatever level they chose to submit, within the allowable amount). This in turn meant that they could then set their budgeted costs based on this information. If payout went up - that was the risk they were taking and as their costs had been worked out on a lower GMP price, they were still going to be ok. If payout went down, they were ok as they had certainty of income as reward for the risk they were willing to take. Suppliers who took up GMP were no different to those who take on Stolle, colostrum, winter milk, organic etc. They all made a conscious decision to do so and were prepared to take on the risk/management changes required. The biggest difference is that the latter group receive a guaranteed price above the prevailing milk price and those options are not available to all suppliers. So we have a more entitled group of suppliers already in our cooperative.

To me part of the appeal of being a member of the Fonterra cooperative is the vertical integration model and being able to vote in directors -even if we are only small fish in the pool. Personally I don't have a problem with suppliers being rewarded for taking up options the company offers. I would like to see company wide 'grass fed' and 'non GE/GMO feed' premiums introduced. But I doubt our overall supplier base is mature enough to accept this. How that would work in practice is also likely to be a challenge.

What has the potential to harm our cooperative is the small mindedness of suppliers who become envious of one group of suppliers who are willing to take on risk/different management in order to allow company diversity of product/risk.

by redcows1 | 3rd Mar 16, 9:20pm 1456993222

Disagree there CO. Many rank n file were appalled right from the start as it most definitely wasn't "in the cooperative spirit". And it made no difference either way to suppliers only shareholders as it is not a part of the milk price manual.

by Casual Observer | 4th Mar 16, 10:09am 1457039375

So how is that not in the cooperative spirit and yet some select suppliers can earn a guaranteed higher price year after year by doing colostrum, Stolle, organic and winter milk, and others aren't offered the same opportunity? GMP was at least offered to the entire supplier base, unlike the aforementioned.

The only suppliers that couldn't have benefited would be those on a set price/kg like contract milkers but they aren't affected by milk price changes anyway. If farmers took on GMP with share/lower order milkers, the share/lower order milkers also got the GMP price so it did make a difference to suppliers.

I have also heard that farmers not sharing the dividend is not in the 'cooperative spirit'. ;-)