Tuesday, 08 October 2019 07:55

Farmers shocked by Fonterra borrowing

Written by  Sudesh Kissun
Federated Farmers Waikato president Andrew McGiven. Federated Farmers Waikato president Andrew McGiven.

Farmers are flabbergasted to learn that Fonterra borrowed money to pay dividends over the last few years.

A Fonterra supplier meeting at Matamata heard that the board has now changed this policy: future dividends shouldn’t require the co-op taking on more debt.

Federated Farmers Waikato president Andrew McGiven says it’s hard to fathom why this was done.

“Maybe it was pressure to hit numbers for performance incentives,” he told Rural News.

McGiven says for many farmers the worst business practice is to pay a perceived profit from debt. 

“It was interesting and alarming, to say the least, how over the last few years that dividend was paid: it was essentially borrowed money to pay these.

“The directors present [at the meeting] put up their hands to say this has now stopped and the company now needs to focus on making cash profits while decreasing debt.”

The Matamata meeting was attended by directors Leonie Guiney and Andy Macfarlane.

In 2015, Fonterra paid 25c dividend, in 2016 40c, in 2017 40c, and in 2018 10c. 

This year the co-op did not pay a dividend after posting a $605 million loss, mostly via writedowns of assets to the tune of $826m.

A Fonterra spokeswoman told Rural News that in past years its dividend “was funded through debt at times”. 

This approach has now changed, she says.

“Previously, the dividend policy included the consideration of near term earnings projections, investment priorities, gearing targets and existing or likely market conditions that may impact Fonterra or our shareholders.

“Our new dividend policy guidelines state that the payment of a dividend should not require our co-op to take on more debt or reduce our co-op’s ability to service existing debt.”

Last month, Fonterra also announced a change in strategy, moving away from supplementary global milk pools to a NZ-based milk pool.

Fonterra chairman John Monaghan says the new strategy sounds simple and the best strategies often are. 

“Simplicity shouldn’t be confused with a lack of ambition,” he said.

Fonterra’s earnings range forecast for 2019-20 starts at 15-25 cents/share. The five year plan is to achieve a target of 50c/share.

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