Two big announcements awaited from Fonterra – one deals with dairy payout, the other with the co-op’s capital structure

So what  are  the  chances Fonterra’s  payout  to its farmer-suppliers  could  top  $8kg/MS the  soon-to-end  current  season?

That would give a  timely  boost  to  the  rural economy  and give  farmers  the kind  of  surge  in incomes  which  would encourage them  to  step up the  pace  of  adapting their dairy farming practices as  the  country  moves  to meet its  climate  change goals.

In March, Fonterra raised its forecast milk price for this season to between $7.30 and $7.90kg/MS with a mid-point of $7.60. That was up from $7.14 last season.

But now, after several  good  results  from the fortnightly GDT auctions, and indications from futures contract prices, the  speculation  is that the payout  could go  higher.

While the GDT index slipped 0.7% at the latest auction this week, the price of whole milk powder, which has the most impact on what farmers are paid, gained 0.7% to an average US$4115 (NZ$5756) a tonne while skim milk powder, the second-most important, rose 2% to US$3433/t.

Butter prices slumped 12% to US$5035/t, weighed down by extra volume on offer.

NZX dairy analyst Stuart Davison said it seems that the extra butter volume saturated demand, while buyers weren’t that keen on paying a premium for butter any longer.  Even so, the price is 30% higher than the same time last year.

WMP prices are 50% higher than at the same time last year, and skim milk powder is 45% higher, largely driven by demand in China where a wealthier population and an increased focus on health and wellbeing after the Covid-19 pandemic is stoking a hunger for better nutrition.

Dairy products are NZ’s largest commodity export and Fonterra estimates milk payments to its 10,000 farmer suppliers for this season will contribute about $11.5 billion to the economy.

Meanwhile,  in  another  significant move, Fonterra has asked the NZX for its shares and units to be placed on a trading halt pending an announcement tomorrow about its capital structure.

The exchange has approved the request.

The trading halt would give Fonterra shareholders and unit holders a full day to review and consider the information before trading recommences.

Fonterra chairman Peter McBride told the NZ Herald in March that fast-emerging challenges in the next 10 years made it essential for Fonterra to look at its capital structure now – despite some shareholders’ views that no change was needed.

He said:

“I’ve heard the ‘if it’s not broken, don’t fix it’ [view]. So do we wait until it’s broken? That’s my response.

“As we start to share with them the challenges we see in the next decade I think sentiment will change.”

McBride noted that 62% of the 1800 farmer-shareholders who responded to a survey on the capital structure review had strongly or slightly supported change.

He also  touched  on the  sensitive issue  of  attracting  capital  from  outside  sources.  There is little doubt that having a fit-for-purpose capital structure for the future is vital for the co-operative to enjoy the success farmers  want   but it has not consistently  achieved this,  particularly  during the Theo  Spierings era.

At the moment only farmer shareholders may directly invest in Fonterra.

Units in the Fonterra Shareholders Fund (FSF) are open to all investors, offering benefits and dividend returns from the performance of the co-operative, but they have no decision-making power for the co-op. They do provide a mechanism for farmer shareholders of the co-operative to sell their shares.

Farmers have long opposed the idea of outside investors directly investing in the co-operative.

Do we get any hints of Fonterra’s intentions from an online survey which farmers were asked to complete?

It carefully broaches the topic of outside investment. But it also raises the topic/prospect of farmers continuing to be the only shareholders of the co-operative.

One section of the survey invites farmers to cite three things that are most important to them.

One of the options is “being able to raise capital from non-farmer investors.”

Another (in contrast) is “maintaining farmer ownership and control of the co-op.”

Fonterra is owned by 10,000 shareholders, who each received an individual version of the survey.

Fonterra’s NZX-traded units last traded at $4.60.

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