It depends on how well the sales team have been doing at moving commodity powders relative to Fonterra. In the industry the FGMP which is largely set based on Fonterra's performance means that if Synlait have sold a similar percentage of volumes and had a similar hedging policy then it will be less of a problem when it comes to profit (as higher FGMP driven by higher sales prices at GDT). Fonterra have in the past (FY14) paid under the FGMP when it was deemed prudent to do so and if profitability is threatened they may do so again. It is likely that SML is similarly not obligated to pay the FGMP - the risk is a loss of suppliers in time if it is too far below however.
At the revenue side of things the biggest problem remains a2 and a lack of customer diversification. I think any investor in ATM should keep an eye on SML announcements as infant formula production needs to be planned a long way in advance. Based on the most recent announcement it would seem that they have lost confidence in the certainty of the forecast coming from a2 and are 'battening down the hatches'. The half year will be interesting to see where costs have been adjusted in response to this demand shift. There have been rumours of a restructure, but nothing has been reflected in the executive team as of yet.
As was pointed out above the advantage of a2 not owning manufacturing facilities (well to date anyway) is that their costs track nicely with demand (no non-cash depreciation costs). When was demand was increasing they even got their manufacturing partner to build new facilities - now that it is dropping they can shrug their shoulders. Even now with a 20% shareholding they are only bearing 20% of impact from their demand changes. However, I would imagine that any volume discounts that had been negotiated would be gone and so margins may not be a fat for them either.
The key question with Synlait remains whether or not the sales team can find other customers or not to fill the capacity with high margin products. With a cost base readjustment they could go the Open Country Dairy route and focus on efficient production of commodities versus Fonterra, but I think the more interesting business remains the higher margin powders they are set up for.