Fonterra ‘raids milk price to pay dividends’

 “The problem was they had to reduce the milk price to farmers to help fund these investments,” Lincoln University professor of farm management and agribusiness Keith Woodford told Dairy News.

“For most, that was simply a retention which became an asset, but for sharemilkers and those farmers who are not shared up it was non-compensated and hence an unfair transfer from them to those who do hold shares, including outside investors.”

Woodford says that with assets of $15.5 billion and liabilities of $9 billion, there are limits to how much Fonterra can prudently spend but if the cooperative wants to “stay up with the game” in international dairy or other FMCG markets it has to keep spending and its current and proposed investments are logical.

“Fonterra has good reason to believe whole milk powder will be the most profitable commodity product in the next few years, hence the focus on increasing capacity of whole milk processing. In this last year it was the limits on WMP processing that stopped the payout from being even higher,” he points out.

Powder investments such as Lichfield (circa $300m) should benefit milk price more than dividend but value-add investments such as Waitoa ($120m), a third Chinese milk hub ($340m split with Abbot) and the Beingmate partnership ($615m for a 20% stake), are for profit and dividend.

“The Waitoa UHT investment is important for Fonterra’s value adding strategies, particularly as they relate to China,” Woodford notes.

Similarly, more milk hubs in China will drive profit because good quality local milk there sells for exceptionally high prices, even at the farm gate.

“The co-investment with Beingmate also has a sound logic. It is far from risk free, but if Fonterra wants to move into value added activities it had to find a local Chinese partner and Beingmate is the obvious one.”

Woodford says Fonterra still suffers from having not retained earnings in its first few years and even now lacks mechanisms to acquire enough capital to put most of its milk into value-added consumer products. Consequently, it “has little option” but to persist as a commodity seller for the most part.

“But being a producer of dairy commodities is not necessarily bad. This is particularly the case for Fonterra, given that Fonterra remains the world’s most efficient processor and marketer of dairy commodities. It is also lower risk than investing in consumer products for overseas markets.”

If Fonterra again raids the milk price to fund value-add investments it seems it will be doing little to endear itself to sharemilkers who, traditionally, would be the shareholders of the future. “It will be grossly unfair to sharemilkers,” Woodford says.