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Fonterra downgrades guidance

Fonterra (ASX: FSF), the New Zealand-based dairy co-operative, has been forced to lower expectations below those provided in last year’s initial public offering (IPO) prospectus.

Fonterra, which has a financial year end of 31 July, blamed “unprecedented volatility caused by extreme drought in New Zealand earlier in the year, and the acceleration of the reshaping of Fonterra’s Australian business” for the lower full year outlook. Management now expects earnings before interest and tax to be around $1 billion, compared with the $1.079 billion stated in the prospectus.

In many ways the result is much better than it could have been considering New Zealand’s drought contributed to whole milk powder prices soaring by 64% since early 2013. Forecasting profits when input price movements like this occur certainly can’t be easy.

Fonterra’s listing marks an important addition for investors wishing to gain exposure to food and beverage manufacturers.  Investors now have a number of options for investing in the dairy sector including Bega Cheese (ASX: BGA), Warrnambool Cheese & Butter Factory (ASX: WCB) and now Fonterra.

Fonterra also adds a geographical diversification opportunity, which as the New Zealand drought proves, is an important consideration when exposed to the risk of agriculture. Goodman Fielder (ASX: GFF) and Freedom Foods (ASX: FNP) also offer investors ways to play the theme of increasing food demand, with Goodman and Freedom both offer exposure to dairy earnings but also exposure to other food segments as well.

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Motley Fool contributor Tim McArthur owns a share in Goodman Fielder.

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