Fonterra says by streamlining its operations and focusing on its ingredients and food services business it can grow greater value for farmer shareholders and unit holders

Dairy co-operative Fonterra is pledging a "significant capital return" to its farmer shareholders if it achieves the planned sale of its consumer businesses.

As foreshadowed when its announced its annual results last week, Fonterra's released a "revised strategy". It says this will see the co-op "deepen its focus on its high-performing Ingredients and Foodservice businesses to grow value for farmer shareholders and unit holders".

Back in May, Fonterra surprisingly unleashed plans to divest its global consumer business, which includes household name brands such as Anchor and Mainland. It said it was looking at a timeframe of 12-18 months to achieve a sale.

According to Fonterra, the consumer and associated businesses that are being put on the block - which include Fonterra Oceania and Fonterra Sri Lanka - collectively utilised approximately 15% of the co-op’s total milk solids and represented approximately 19% of Fonterra’s group operating earnings in the first half of the 2024 financial year.

So, while no numbers have been talked about in terms of a sale price, presumably any successful sale could see a very chunky payment made to shareholders.

Chairman Peter McBride says Fonterra's revised strategy "creates a pathway to greater value creation, allowing the Co-op to announce enhanced financial targets and policy settings".

"The Co-op exists to provide stability and manage risk on farmers’ behalf, while maximising the returns to farmers from their milk and the capital they have invested in Fonterra.

"Through implementation of our strategy, we can grow returns to our owners while continuing to invest in the Co-op, maintaining the financial discipline and strong balance sheet we’ve worked hard to build over recent years."

Fonterra has established a range of new targets, which can be seen in the graphic below:

Chief executive Miles Hurrell said Fonterra is "clear on the parts of the business that create the most value today and where there is further headroom for growth. These are our innovative Ingredients and Foodservice businesses, supported by efficient and flexible operations".

"By streamlining the Co-op to focus on these areas, we can grow greater value for farmer shareholders and unit holders, even if we divest our Consumer businesses.".

Fonterra has made six strategic choices. These are:

1. Deliver the strongest farmer offering – work alongside farmers to enable on-farm profitability and productivity and support the strongest payout.

2. Unleash the Ingredients engine – deepen Fonterra’s position as a world-leading provider of sophisticated dairy ingredients and build trading capability to grow both the Farmgate Milk Price and earnings.

3. Keep up the momentum in Foodservice – expand our successful Foodservice business in China and other key markets to grow earnings.

4. Invest in operations for the future – an efficient manufacturing and supply chain network that allows flexibility to allocate milk to the highest returning product and sales channel.

5. Build on our sustainability position – further improve the Co-op’s sustainability credentials and strengthen partnerships with customers who value this position.

6. Innovate to drive an advantage – use science and technology to solve the Co-op’s challenges and build on competitive advantages.

Hurrell said Fonterra's improved returns will primarily be driven by increased earnings in Ingredients and Foodservice along with operational efficiencies.

“We continue to have significant capital investment needs ahead of us to maintain fit for purpose assets and we can meet these investment requirements while maintaining our strong balance sheet."

Fonterra will provide farmers and the market a rolling three-year forward-looking view of the financial assumptions underpinning its performance targets annually and will measure progress through its annual business updates.

"This is the right strategy for the Co-op. It has a clear-eyed view of where we best generate returns for farmer shareholders and unit holders and will see us unlock value at every point in our supply chain by focusing on our strengths.

"Together, Fonterra’s Board and Management are looking forward to working alongside our Co-op’s farmers and employees to deliver on our vision to be the source of the world’s most valued dairy,” Hurrell said.

See dairy payout history and economists' price predictions.