Olam International, a supplier of food commodities, said it may exit dairy processing in New Zealand as an increase in milk prices by a supplier is likely to lead to losses and temper earnings from other businesses.

 

The Open Country Dairy unit is likely to report a full-year loss after Fonterra Cooperative Group raised its milk sales price, making the business “not viable,” Olam Chief Executive Officer Sunny Verghese said today at a briefing in Singapore. Should a probe by New Zealand’s government support Fonterra, “we will want to exit,” he said, referring to a government review of prices sought by Open Country.

 

Auckland-based Fonterra procures milk from farmers for re- sale to processors including Open Country, which makes cheeses, fats, and powdered milk. A “surprisingly high” price announced by Fonterra for 2011 has eroded the profits of dairy-processing companies, Olam said.

 

The fortunes of Open Country Dairy contrast with those of the parent, which posted a 43% increase in third-quarter profit today. Net income in the three months ended March 31 was $127.3 million, Singapore-based Olam said today in a statement. Revenue surged 75% to $4.74 billion on a 24% jump in commodity sales volumes.

Net contribution per ton, or revenue after cost of sales, shipping and logistics expenses, claims, commission, bank charges and net interest, increased 44% to $132.2 million in the nine months ending March 31, Olam said.

 

“This is one of the strongest periods of growth in net contributions per ton that we have achieved in the last five years,” Olam Chief Financial Officer Krishnan Ravikumar said in the statement.

 

Olam, backed by Temasek Holdings, fell 2.8% to $2.81 at the close of trade today in Singapore. The results were announced after the market closed.

 

Olam, one of the world’s top three suppliers of rice, cocoa and coffee, is expanding into sugar milling and urea plants in Africa and dairy farming in Latin America. The company aims to transform itself from a trading house to one with production assets to earn bigger margins. Olam plans to move into farming of cashew, spices, dehydrates, grains and sugar by 2015.

 

The supplier is bullish on coffee, where the global supply- demand balance is “deteriorating,” and neutral on palm oil due to an excess supply of soybeans, Verghese said today in an interview on the sidelines of the briefing in Singapore.

 

Olam is also “neutral” on the price outlook of cotton after growers planted more of the crop in response to the record prices, Verghese said. The potential for a drought in Texas may change the supply outlook, he said.

 

The basket of commodities, including rice, sugar, cocoa and cotton, jumped 52% in value from July 1, 2010, to March 31, the company said. The Standard & Poor’s GSCI Agriculture Index of eight futures jumped 69% in the same period, Olam said. Olam hedged 88% of its inventories, it said.

 

Separately, all its operations in the Ivory Coast have resumed and it shipped its first load of cocoa to the U.S. at the start of May, Olam said.

 

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