Fonterra profits jump but Australian business records 19% drop

But the giant New Zealand co-operative's Australian arm has not performed to the same level - with a 19pc drop in gross profit to $NZ138 million compared with the same period last year.

Fonterra Australia's Earnings Before Interest and Tax (EBIT) were down 43pc on the first half.

Fonterra pointed to the high cost of milk in Australia, which was disconnected from global commodity prices, as the key factor in the poorer result.

"The Australian market has been challenging for many dairy processors over the last 12 months," Fonterra Australia managing director René Dedoncker said.

"The financial performance of our ingredients business is impacted when the milk price is high relative to commodity pricing.

"However, we are pleased to be growing our value-add proposition and have increased sales for our proteins, functional nutrition and probiotics.

"For Fonterra, our focus is on reducing our costs and improving return on capital.

"Work is well underway to identify and implement a range of initiatives which will deliver cost savings for our business."

Mr Dedoncker said while earnings were down, the Australian business was strong with solid fundamentals.

"Our Australian business remains profitable with good domestic demand, and we continue to see value growth in consumer and foodservice," he said.

"Our consumer brands remain number one in the butter and spreads and cheese categories.

"This has been achieved despite a shift in consumer demand to private label and lower-price competitor products - which is only possible due to the strength of our brands."

Mr Dedoncker said the subdued demand for out-of-home products, due to pressure on consumers, had hit the foodservice section of the business.

Fonterra Co-operative Group overall performance was strong - with profit up 23pc to $NZ674 million and EBIT up 14pc to $NZ986 million.

CEO Miles Hurrell said the performance had been driven by higher margins and sales volumes across Fonterra's diversified product and category mix.

The co-op recently lifted its forecast farmgate milk price for its New Zealand suppliers to $NZ7.80 a kilogram milk solids.

"While supply and demand dynamics remain finely balanced, with continuing global uncertainty, we are now well progressed through the season," he said.

"This gives us the confidence to narrow our forecast farmgate milk price range to $NZ7.50-$NZ8.10/kg MS.

"We have also maintained our forecast earnings guidance for the year of 50-65 cents per share."

Mr Hurrell warned of potential volatility as a result of geopolitical instability - despite global inflationary pressures easing.

"Our partnership with Kotahi and diversification across markets means we're well prepared for disruption in global supply chains or changes in demand from key importing regions," he said.

The co-operative had made progress on its strategy to create value for farmers, commercialise its sustainability position and unlock capacity through innovation.

"Since announcing our on-farm emissions target, we have been working with customers to commercialise our farmers' sustainability credentials," he said.

"This includes introducing to customers our regenerative agriculture position, which recognises our farmers' pastural farming system."