State owned farming business Landcorp sees profits shrink 83.5% in the face of plummeting milk prices and lower lamb returns

State-owned farming business Landcorp has seen annual profits plunge over 83.5% to $4.9 million in the face of sharply declining milk prices and lower returns on lamb.

The company’s total revenues in the year to June slipped 9.2% $224.3 million, while within this, income from farm products dropped 11.7% to $213.5 million.

However, total liabilities increased to $361.8 million from $320.2 million, with bank borrowings rising to $210.7 million from $172.4 million in 2013/14.

Total assets have risen by $26.2 million to $1.77 billion.

The actual result compared with a targeted profit of $31.7 million for the year.

Recently Prime Minister John Key, Finance Minister Bill English and State Owned Enterprises Minister Todd McClay raised concerns about Landcorp’s ability to finance dairy conversion commitments in the years ahead.

SOE Minister Todd McClay said he was having an ongoing discussion with the board of Landcorp.

“I want to make sure that with changes some of the pricing around dairy and other things that it doesn’t become an issue for them. Landcorp buy and sell farms all the time. It is fair to say a few years ago they purchased a lot more farms and that created some debt,” McClay said.

“They are also working through some issues in as far as a contract they entered into in 2004 around land conversions which means that they will have expenditure in the next few years going forward. It’s important we get the right balance. It’s a sustainable business, we want to make sure the debt doesn’t get ahead of them,” he said.

Landcorp chief executive Steven Carden said today that record-low dairy prices and tough growing conditions had driven overall financial performance down. However, a “constructive” response to challenging conditions had helped buffer Landcorp from major impact.

“It’s been tough for Landcorp and the entire dairy sector, so our result is solid in that context.

“Things might have proved even more challenging had we not secured a significant volume of supply to Fonterra under their Guaranteed Milk Price scheme at prices that were above the final payout level.”

Lower milk revenue of $88.1 million ($129 million in 2013/14) was partly offset by growth in livestock revenues to $111.3 million ($98.7 million in 2013/14), driven by growth in livestock production and higher beef prices. Lamb production had also increased despite an unusually dry summer.

More than one third of the 430,000 finished new season lambs were supplied on an exclusive fixed price contract to United Kingdom supermarket giant Tesco for its Finest programme of premium meat.

Carden said Landcorp’s drive toward fixed price supply contacts, particularly for higher value niche products, was gaining positive traction.

“For example, our wool revenue increased to $10.7 million for the year ($9.1 million in 2013/14) based on higher demand from overseas. Our partnership with the New Zealand Merino Company in the past 12 months has secured multi-year, fixed-price contracts with brands such as Danish footwear-maker Glerups, and Swanndri.

“Rather than being dictated to by the fluctuations of commodity price cycles, we’re locking in supply deals with partners who can help us maximise the value of what we produce.

“In the medium and long term we intend to expand our portfolio into new, high-value products. Sheep milk, for example, is a premium product opportunity for Asian markets and last week, with our Joint Venture partners SLC group, we opened our first sheep milking facility on the Central Plateau,” he said.

Carden believed that Landcorp had run a conservative balance sheet, with low levels of debt relative to its assets.

“We have purposely taken a long-term outlook on our operating environment, rather than seek riskier, short-term gains.

“We’ve worked hard to remove risk from the business and the diversified nature of our operations and income from dairy, red meat, wool and forestry further reduces risk. Our solid results in very challenging conditions reflect this.

“We’re very comfortable with our level of debt. It has moderately increased over the past few years to fund dairy conversions on the Central Plateau and complete conversions in Canterbury, based on long-term views of dairy payout levels.

“We’ve kept costs flat while continuing to work on initiatives across the five core areas of our strategy. Tight cost controls, precision application of fertiliser and aligning our farming systems to a lower milk price have all yielded savings. A flat cost structure is a pleasing result, given we had an additional five farms come into production during this period. ”