Divestment means Fonterra can focus on its strengths
OPINION: Fonterra's board has certainly presented us, as shareholders, with a major issue to consider.
Westpac’s head of agribusiness, Mark Stead, says a lot of its dairy customers are volunteering to pay back some of the debt they incurred because of the two bad seasons, when many farmers were forced into new debt just to keep their businesses running.
As well as paying back the banks, they will also have to pay back money they borrowed from Fonterra.
“I think there is a proactive approach by the farmer base to get equity back into their businesses,” Stead told Rural News.
“As a result of the last season’s downturn, they are volunteering a lot of free cashflow towards amortisation – given that all the banks have been supporting their customer base over the last two years.
“Instead of playing catch-up capex, which is obviously a requirement, they are coming back to their banks and saying ‘you helped us through the last two years by capitalising losses; now we’d like to replenish some of the equity we lost’,” he explains.
Stead says this optimism was also reflected at Fieldays, “with a sigh of relief... because of the lift in payout”.
If the dairy payout had not risen Fieldays would have been very different, he says. But now people are far more optimistic and positive than a year ago.
He says it appears most dairy farmers can now live with costs that equate to about $4.50/kgMS and with the $6 payout there is some spare cash to repay debt or for operating or capital spending.
But Stead warns that the turmoil of Brexit and Trump mean volatility will be the norm for the foreseeable future, so farmers and bankers are working together to find the best ways to deal with this.
The other black cloud on the horizon is interest rates. “The interest rate environment is changing and rates are increasing. With low deposit rates, superannuitants have been looking at other asset investment besides bank deposits... equities and property.
“The fact is that 75% of the way banks fund themselves is with term deposits, but with the fall-off in deposits they are having to go offshore for funds, which is more expensive and pushes up interest rates in NZ.”
