September 24 2017, updated 9:29am

Dairy farmers profit as Fonterra lifts payout

Last updated 12:06 30/05/2008

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Fonterra exceeded expectations when it hiked the dairy co-operative's milk payout by 60 cents per kg of milksolds to a record $7.90 for the 2007-08 season.

The company also beat most predictions when it announced an initial forecast for 2008-09 of $7.00/kg.

However, the company also announced a fall in its Fair Value Share (FVS) price of $1.22 for 2008-09 to $5.57. And only 35 cents of this season's payout is the valued-added component.

The country's biggest company said it would retain 30c/kg of this season's payout as insurance against volatile markets.

Commenting on the FVS price drop, chairman Henry van der Heyden said no one liked it.

"We can't have our cake and eat it too. The credit crunch in global financial markets, ongoing high commodity prices cutting into our ingredients margins and a higher milk price has hit our share price."

Turmoil in world financial markets meant Fonterra had to pay higher interest rates.

A 30c/kg lift in payout is worth an extra $30,000 to the "average" farmer which will bump the average payout to around $800,000 for the co-op's 10,711 farmers. But for the drought that cut production, the payout would have been even higher.

The economy still gets a $9 billion injection from dairying.

High dairy prices, lower production due to the drought, a weakening currency and performance gains were behind the latest hike.

Some Fonterra farmers with three or four farms will collect multi-million dollar payouts.

Fonterra signalled in April the potential for further upside in this year's payout, and Mr van der Heyden said today it was satisfying to deliver – given unstable financial markets.

The payout increase would offset the drought and rising costs, which have lifted by nearly a third over the past year.

Mr van der Heyden said the fall in the FVS was in line with the fall in prices on the sharemarket.

Because of the drought most farmer-shareholders held excess shares (above their season's milk production) and they can surrender these at the current share price of $6.79.

With next year's price set at $5.57, farmers are likely to act on that.

As well, Fonterra faces cash pressures from farmers selling shares as they quit the industry.

To protect it from a flood of redemptions, farmers will be issued with more shares at the beginning of next season, rather than at the end.

"In other words they will be paid out the $1.22 differential between the two share prices for each share they choose to surrender," Mr van der Heyden said.

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Payments at the end of the season will be made in cash, capital notes or a combination of the two.

And as a result of the fall in the FVS farmers will be allowed to increase production by up to 20 per cent without buying more shares.

Chief executive Andrew Ferrier said forecasting was problematic due to unprecedented volatility in all agricultural commodities.

"In recent seasons, there has always been a higher probability that the forecast would go up. Next season the volatility in prices means there is an equal possibility of it going up or down."

The independent valuer, Duff and Phelps, determined a range of $5.26 to $6.11 for the FVS with a mid-point of $5.68 but the board set the value 11c lower to reflect a one-off net cost of redeeming "dry" shares (shares not backed by milk supply this season) due to the drought.

The general rise in commodity prices had compressed the difference between international and domestic commodity and ingredient prices in markets such as the US, Europe and Japan – where prices were traditionally higher.

Mr van der Heyden said the valuer had had to take account of the higher milk price which resulted in a decline in the value of Fonterra's core ingredients and global trading business.

"Unstable global financial markets, high commodity prices squeezing ingredients margins, and a higher milk price have impacted negatively on farmers' investment in the co-operative."

On the positive side, Fonterra's consumer businesses were more profitable.

Dairy Farmers of New Zealand's vice-chairman, Lachlan McKenzie, a Fonterra supplier, told Radio New Zealand that today's higher payout was a welcome surprise.

He said even the banking industry had not been budgeting on such a high price for next season.

"Certainly, the $7 opening bid is welcome news."

The 30c/kg retention would help prop up the FVSs.


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