Fonterra has cut its farmgate milk price forecast for 2018/19 to $6.00 to 6.30 kg of milk solids from a previous range of $6.25 to $6.50/kg, and has confirmed that its Tip Top ice cream business is up for sale.

The co-op, which is part-way through a stock take of its operations and assets, said in market update that it planned to go to full ownership of its Darnum, Victoria, milk powder facility that it jointly owns with China's Beingmate.

Fonterra also forecast earnings per share of 25 to 35 cents a share for the full year.
The co-op's first-quarter revenue came to $3.8 billion, down 4 per cent.

Chairman John Monaghan said the revision in the milk price was due to the global milk supply remaining stronger relative to demand, which has driven a downward trend on the GlobalDairyTrade (GDT) index since May.

"Since our October milk price update, production from Europe has flattened off the back of dry weather and rising feed costs. US milk volumes are still forecast to be up one per cent for the year," Monaghan said in a statement.

Fonterra said it was maintaining our forecast collections at 1,550 million kgMS.

Weather agency NIWA is saying its likely we will see an abnormal El Nino weather pattern over summer and this could impact our farmers' milk production, he said.

"Demand from China and Asia remains strong. However, we are seeing geopolitical disruption impacting demand from countries that traditionally buy a lot of fat products from us," he said.

Fonterra's first quarter gross margin of $646 million was down $14 million compared to the same period last year and up slightly on a percentage basis from 16.6 per cent to 17 per cent.

The Co-op's Ingredients business, despite lower sales volumes, performed solidly during the quarter with a gross margin of $273 million, up $28 million on last year.

The Consumer business also performed well with a gross margin of $310 million, up $10 million on last year, and volumes were up five per cent.

Chief executive Miles Hurrell says the Co-op generally makes a smaller proportion of its total annual sales in the first quarter due to the seasonal nature of our milk supply.

"This means the results from Q1 do not give much insight into the Co-op's expected earnings performance for the full year. It does, however, put the spotlight on where we have challenges that we need to address," Hurrell said.

Commenting on the board led portfolio review, Monaghan said there had been but that it would take time to flow through into financial results.

"We have reached an agreement in principle with Beingmate that will see us return to full ownership of the Darnum plant by 31 December 2018 and enter into a multi-year agreement for Beingmate to purchase ingredients from us," he said.

"We are also looking at our ongoing ownership of Tip Top and have appointed FNZC as our external advisor to work with us as we consider a range of options," he said.

"We want to see Tip Top remain a New Zealand based business and this is being factored into our options."

"While performing well, Tip Top is our only ice cream business and has reached maturity as an investment for us.

"To take it to its next phase successfully will require a level of investment beyond what we are willing to make," he said.

Fonterra said it was moving quickly to meet its commitment to reducing debt levels by $800 million by the end of the financial year.

"This requires both improved performance from last year and the divestment of assets," Fonterra said.

The Darnum joint venture - 51 percent owned by Beingmate and 49 percent Fonterra - produced infant formula products at the Darnum plant in Australia for Beingmate's Chinese customers, and was a key component of Fonterra's plan to expand its reach into China's second and third-tier cities.

That Beingmate partnership included Fonterra taking a 18.8 per cent stake in the Chinese firm for $750 million, and investment that the co-op has to write down by $405 million.
The Beingmate holding is also under review.

Tip Top déjà vu

Fonterra has also announced that iconic icecream company Tip Top is on the market.

The move, which has made headlines in recent weeks, has been described as a case of déjà vu by a former government official, who says he once put Tip Top atop a fire sale list when there were fears the state might have to bail Fonterra out.

That was back in the last quarter of 2008 and into 2009 when the GFC was biting and Fonterra "had no money", said economist Peter Fraser, a former principal advisor with the Ministry of Agriculture and dairy sector specialist.

He recalls the global financial crisis was in full swing, international credit lines were frozen, commodity dairy prices had gone south on Fonterra's new, controversial Global Dairy Trade (GDT) auction platform, a general election had just seen National return to form a minority government, and Fonterra was starting to stockpile powder rather than accept market returns.

That stockpile at Fonterra's Clandeboye site in south Canterbury would soon be the size of Auckland's 24 hectare Sylvia Park, said Fraser. While the stockpile grew, no money was coming in. No money meant the risk of Fonterra's farmers not being paid, which meant they could not pay their banks.

Meanwhile, bad publicity continued from Fonterra's investment in China's Sanlu, the company at the centre of the melamine poisoning that killed and injured children.

"We could see things going pear-shaped overseas and there were concerns, I knew in the financial markets too, about Fonterra... it's big, is it going to be okay?

"Fonterra had no money....this was on the back of a huge $7.90 (kg milksolids) payout to farmers (2007-2008 season)."

Fraser said the response from Fonterra's top management to ministry officials' approaches was "nothing to see here, move on".

For Fraser, alarm bells really went off when Fonterra secured a large loan in British sterling, and "they paid a fortune for it".

"Fonterra only borrowed in US dollars because that's what it traded in. It told us straight away that Fonterra couldn't access credit in US markets."

Fonterra's balance sheet at the time allowed it minimal room to run up more debt, he said.

Fraser said he and colleagues began meeting each week to review Fonterra's situation and options. A list of possible "quick" trade sales of Fonterra assets emerged.

On it were Tip Top and Fonterra's South American assets.

The concern, said Fraser, was that Fonterra, created from an industry mega-merger in 2001 by special legislation to be a national export champion, may have to be bailed out if its balance sheet deteriorated. The Labour government legislation allowed the merger to get around Commerce Commission opposition to the merger.

That fear consolidated when ministry officials were visited by a Fonterra senior executive, Fraser said.

"He said things aren't good. He said we're stockpiling because we don't know where the bottom of this market is. He said we've no idea and if it gets much worse we are going to start running out of money."

Fraser said the situation with Fonterra's balance sheet arose, and remains a problem, because it's "basically a postbox".

"All this milk comes in (to it) in the spring flush, it all gets shipped, then a tsunami of money comes in from overseas, then it gets paid to farmers and Fonterra clips the ticket on the way.

"Because they were stockpiling, a big chunk of those money flows basically stopped. At the same time the money markets were frozen."

Fraser said he briefed new finance minister Bill English on the situation, suggesting much of the problem was Fonterra's "lack of balance sheet separation".

"Where does Fonterra's balance sheet stop and farmers balance sheets start, given the (milk) payout subordination? I said if international markets don't recover and Fonterra continues to stockpile, the amount of money coming in will get substantially less.

"Our short-term concern was they would get some money coming in but with payout subordination, Fonterra's obligation to the banks would get paid but what about farmers' payment to the banks? This was about the same time we were starting to worry about dairy debt which had gone from nothing to $20-30 billion (with conversions and dairying expansion)."

Another concern for government officials was how long the packaging on the stockpiled powders would last before the huge collection had to be written down, and then written off Fonterra's balance sheet, Fraser said.

Fortunately for Fonterra, prices on GDT started rising into 2009, credit lines eased, and the company started clearing the huge stockpile, he said.

"It was by the skin of the teeth though."

Fonterra's current financial squeeze, which saw it declare its first ever net loss last month, is attributed by industry watchers to it having no real retentions-from-earnings policy, as well as loss-making investments in China.

The $20 billion revenue farmer-owned cooperative has a new chairman and chief executive who last month undertook to hold a review of Fonterra's strategy, assets and investments.

- Jamie Gray and Andrea Fox