USA – New Zealand dairy giant, Fonterra has announced that it has reached an agreement with Nestle for potential sale of respective stakes in their Dairy Partners Americas (DPA) Brasil joint venture.

Fonterra has also unveiled plans to close its Dennington site in Australia, a move it says is part of its new strategic direction- “prioritizing our New Zealand milk supply and simplifying our global portfolio”.

Fonterra says the Australian Ingredients business continues to feel the impact of the drought and excess manufacturing capacity.

“This is not a one-off for this season, it’s the new norm for the Australian dairy industry and we need to adapt,” said Fonterra Chief Executive Miles Hurrell.

“We need to get the most value from every drop of our farmers’ milk and, with the reduced milk pool in Australia, we must put it into our highest returning products and most efficient assets,” said Hurrell.

DPA was created in 2003 producing milk powder, chilled and liquid dairy products in which Nestlé holds a 49% stake, while Fonterra owns 51%.

DPA, which reported sales of US$247.5 million in 2018 operates two plants and employs 1,400 people.

Its well-known brands in the Brazilian market include Nestlé, Chamyto, Ninho, Chandelle, Chambinho, Neston and Molico.

The review into future ownership options of DPA and whether to sell is expected to be completed by the end of 2019.

New strategy coming in September

Hurrell said the strategic review was progressing well and they are set to reveal the new strategy in September.

He said that the new initiatives mean to reduce complexity and simplify the business structure and focus on where they have competitive advantage.

“Farmers and unit holders can expect to see some fluctuation in our earnings over the next couple of years and there will be one-off transactions and adjustments (some positive, some negative) as we reset the business and deliver on our new strategy,” he said.

“We are committed to keeping people updated as we make progress.

“These decisions relate to our new strategic direction – in particular, prioritising our New Zealand milk supply and simplifying our global portfolio, which, as we have said previously, requires us to review every part of business to ensure it meets the needs of the Co-op today.”

The New Zealand dairy cooperative is also commencing a strategic review of its two wholly owned farm-hubs in China.

“We have contributed to China’s dairy industry by developing high quality model farms and showing there is a valuable opportunity for fresh milk in China’s consumer market, and this continues to be an attractive prospect,” commented Miles Hurrell.

“However, this does not necessarily mean that we need to continue to have large amounts of capital tied up in farming hubs.”

For the full year ended July 2018, Fonterra reported a net loss of NZD 196 million (US$128 million), its first annual loss since its inception in 2001.

Fonterra has also released its business update and revised its earnings from 15 – 25 cents per share to 10 – 15 cents per share.

Revenue for the nine months to 30 April 2019 stood at NZD 15 billion (US$9.74 billion), up 1% on the prior year period while normalized EBIT was down 9% to NZD 522 million (US$338.9 million).