Wednesday, July 6, 2022

Fonterra forecasts $2b bounty for dairy farmers

The new dairy season holds the prospect of an average $150,000 more per dairy farm to aid the recovery from drought, although it will be spring before the taps flow.

Fonterra has aggressively forecast a record $7/kg milksolids price for 2013-14 and has just as aggressively lifted the advance rate to a record $5.

Compared with the 2012-13 season, which ended on Friday, Fonterra is forecasting a $2 billion boost to the rural economy, equivalent to 1% growth in GDP.

The greater advance rate proportion comes from the stronger balance sheet, which through dividend retention and share purchasing the farmer-shareholders created, Fonterra chairman John Wilson said.

It will help farm cashflows recovering from the drought costs of supplementary feeding and autumn milk production cut short.

However, nothing could be done at present, with the forecasts of milk price and dividend for the season ended last Friday, Wilson said.

“We will have to work hard to get to $5.80/kg milk price and the 32c dividend.

“We advise farmers to be cautious in managing their budgets, as we have seen a sharp drop in milk volumes because of the drought and recent declines in GlobalDairyTrade auction results,” he said.

However, Fonterra is surprisingly confident in the international marketplace outlook, forecasting prices to remain strong through this year and probably into next year also.

It cites 0.5% milk volume growth this year among the top 15 exporting countries, less than a third of the rate of growth last year.

“Yes, we are confident that the market outlook will deliver $7/kg, and we must be really confident to hike the advance rate to $5,” Wilson said, adding that clawing back from the advance was a no-go area for directors.

But the first time the board made a $7/kg pre-season forecast for total payout, not just milk price, in May 2008, the season unravelled, causing considerable pain for the co-operative and its farmers.

The milk price ended 2008-09 at $4.72, having shed $2.28, or one-third, although the top-up dividend was a record 48c and total payout was $5.20.

“I remember that well as a farmer and as a director and we don’t want to go there again,” Wilson said.

The commodity price boom created $2/kg payout movements, plus and minus, in consecutive seasons.

In recent years volatility within and between seasons has been limited to $1/kg or less, despite the global financial crisis. The 2011-12 season also started high and ended lower.

But Wilson pointed out international dairy prices were 60% higher now than May last year, showing volatility remained a fact of life.

The first prediction of the 2013-14 profit and dividend won’t be made public until July.

That is of most interest to unit holders in the Fonterra Shareholders Fund (FSF), being their potential yield on a high $7 unit price.

It has tempted one-fifth of Fonterra’s farmer-shareholders to offer to sell their permissible maximum economic rights of 36,000 shares per farm on average into the FSF.

Collectively they offered 75 million rights at Fonterra’s offer price of $7.92.

However, Fonterra limited its exposure to $475 million, being the remainder of the investment cash raised last November. It therefore scaled back acceptance to 80% of farmers’ offerings.

At 6% of the total shareholding the size of the FSF remains below the TAF target range (7-12%), so was consideration given to accepting the whole 75m rights offer at $595m and expanding the FSF?

Wilson said the board wanted to stick to the prospectus timetable regarding the size of the FSF.

“We recently made a bonus issue and farmers move to a three-year rolling average share standard in June, so we are happy with the size of the FSF at present.”

He said farmers appeared to want money from economic rights for drought recovery and for opportunities within their own businesses.

Farmers were growing more comfortable with the complexity of TAF and appreciative of the flexibility it contained.

They must also favour their chances of being able to redeem full share entitlements at a lower cost in future.

Farmers have until December to comply with the new share standard and many more are transacting on the sharemarket.

“That market was always going to be a slow build and very pleasingly it is all working technically as proposed,” Wilson said.

Fonterra Shareholders’ Council chairman Ian Brown said Fonterra was able to make better use now of share capital under TAF, rather than have the redemption risk from drought-affected farmers.

Federated Farmers dairy section chairman Willy Leferink said the 2013-14 opening forecast was amazing but members of the public needed to know $7/kg MS (or 58c/litre) was farm revenue, not profit.

Estimated farm working expenses took about $4/kg before bank loans were repaid, and before the costs of drought.

“I know farmers paying something like $1000 a day in supplemental feed costs and some will make losses of hundreds of thousands this season,” he said.

“We’ve got pasture to recover, herds to rebuild and debt to repay, so the higher advance is a godsend.”

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