Milk is on everyone's lips at the moment, and New Zealand based dairy co-operative Fonterra (ASX: FSF), which is listed on the ASX as a shareholder fund, is doing a good job keeping it there by announcing a huge 33% jump in net profit after tax (NPAT) and subsequent 33% increase in interim dividend.
The increase was driven by an 8% increase in sales volumes and a 29% increase in gross margin for NZ milk products, both driven by a strong international demand for milk products. It's a hugely positive result for both New Zealand farmers and owners of the Fonterra Share Holder fund which was listed last year, despite New Zealand's North Island currently being in the grips of the country's worst drought in decades.
The increase in milk price is also good news for Australian dairy farmers who have also suffered temperamental farming conditions and complained recently of the negative impact of the price war between supermarket operators Woolworths (ASX: WOW) and Wesfarmers Limited (ASX: WES) which owns the chain of Coles supermarkets.
As with many commodity booms recently, much of the huge international demand for milk products is being driven by China who has smashed the country's annual import quota earlier for the third year running as the population grows and distrust of local milk production from contamination lingers. Due to local regulations, China can only import 71,000 tonnes of milk products before having to pay import tariffs, but it hasn't dented demand.
So should you rush out and buy into Fonterra, or stock-pile pallets of milk powder under your bed? Not without a word of caution. Fonterra CEO Theo Spierings notes the strong first-half result is unlikely to be repeated in the second half, with the company's full-year result forecast to be in line with last year as competition in Australia intensifies and demand across Asia looks like it may slow.
Foolish takeaway
Increasing prices of dairy products will benefit more than just Fonterra. Investors wanting to capitalize on the white gold rush could also consider producers and suppliers like Warrnambool Cheese and Butter Factory Company (ASX: WCB), Australia's oldest dairy producer, or Bega Cheese Limited (ASX: BGA), which most recently increased interim profits by 13.6%. Both companies could gain if the price and demand for their products increase, however both could also suffer if demand does not keep pace or commodity prices drop.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Regan Pearson does not own shares in any of the companies mentioned in this article.
