Fonterra may pull out of Beingmate China deal following disastrous results announcement

18-Sep-2018 - Last updated on 18-Sep-2018 at 07:23 GMT

Fonterra may exit its deal with Beingmate altogether, in the wake of the first ever annual loss in its 17-year history.

The world’s biggest dairy co-operative will review its stake in Chinese formula milk company Beingmate after unveiling the first ever annual loss in its 17-year history.

Fonterra, which is also New Zealand’s largest company, saw last year’s profit of NZ$745m (US$488m) plummet into a NZ$196m (US$128m) loss following a turbulent year.

“There’s no two ways about it, these results don’t meet the standards we need to live up to,” interim chief executive Miles Hurrell said after revealing the 2018 financial year results.

But the atmosphere at the Auckland press conference was grim, likened by one commentator as akin to a rugby coach explaining away an All Blacks defeat in a world cup they should have won.

Hurrel blamed the poor performance on overly optimistic forecasting, high butter prices impacting sales and margins, an increase in the forecast farmgate milk price and high operating expenses in some parts of the business.

It will not have helped Fonterra’s balance sheet that it wrote down NZ$405m of its investment in Beingmate, a Chinese company that owns dairy farms and is a supplier of dairy products including infant formula, in March. It was also forced to pay out NZ$183m to Danone for its part in a 2012 false botulism scare this financial year.

The co-operative paid NZ$750m for an 18.8% stake in Beingmate in 2015 because It wanted a Chinese business partner with established marketing and sales channels to sell its Anmum infant formula, and other products. Beingmate had 80,000 retail outlets and 20,000 "maternal service consultants" to distribute the products.

Since then, Beingmate has amassed large debts as it rapidly expanded, and its share price has gone into freefall. Its market share in China currently stands at 2.5%, compared to 9% in 2013.

Getting out?

There is now talk of exiting from its Chinese business partnership altogether, which had promised much but had failed to deliver — even though Fonterra products now make up about 11% of all dairy consumed in China and about a third of dairy imports into China are from the co-operative.

Hurrell said Fonterra will re-evaluate all investments, major assets and partnerships to ensure they still meet the cooperative’s needs, and it will "get the basics right" and ensure more accurate forecasting.

“This [review] will involve a thorough analysis of whether they directly support the strategy, are hitting their target return on capital and whether it can scale them up and grow more value over the next two-three years,” a company statement said. “This will start with a strategic review of the co-operative’s investment in Beingmate.”

Some analysts, who had earlier been predicting dismal results, believe this suggests that the co-operative will scale back on its foreign forays and focus on its well-run and well-organised New Zealand plants.

“I get a sense that they are willing to make the hard decisions when they have a clear view of the performance of various assets,” one told the Financial Times following.

Kiwi dairy farmers, from whom Fonterra buys its milk, have been left reeling from the results. As they must buy shares in Fonterra for the co-operative to purchase their product, they have watched the value of their stake decline substantially over the last year.

One farmer was quoted as saying that his dairy has been forced to pay over NZ$4m in the last 12 months to supply milk to, and own shares in Fonterra.

Winston Peters, New Zealand’s deputy prime minister was unimpressed by Fonterra’s performance.

"When you see a performance of the type Fonterra recently delivered, somebody a long time should have been asking some serious questions. The loss of NZ$1.3bn has to have people asking questions," he raged after the results had been announced.