Peak of dairying may have passed

By Hugh Stringleman, agricultural writer

Friday 8th March 2002

Dairy farmers are facing the reality of the industry having peaked and already the flow of conversions in the South Island has slowed.

Fonterra Co-operative chairman John Roadley said in Taranaki this week the "best estimate" for the full-year payout to farmers would be $5.30 per kilogram of milk solids.

This compares with the first- half payout of $5.60. But international prices for milk powder and butter have fallen as much as 40% since the beginning of the current season and the big co-operative has already signalled a milk price expectation for next season of $4.50.

Fonterra declared an "operating surplus" after minority interests for the half-year of $2.9 billion, which it is assumed will be paid out to suppliers. However, the board of directors will decide on the final payment to suppliers at the end of the financial year in May.

Fonterra is also measuring itself against an independent Standard & Poor's interim estimate of $5.73/kg for the commodity milk price for the current season, without any added-value earnings. Fonterra chief executive Craig Norgate has said the high level of that estimate (made in December) was a surprise, resulting in a big expectation of performance on the company in its first year.

Last week's inaugural announcement of financial results was misrepresented by some media outlets as a "profit" of $2.9 billion on revenue of $7 billion.

Fonterra itself studiously avoided the "P" word, and does not encourage any comparisons with the reporting structures of large listed companies such as Telecom.

The operating surplus is what is left after processing, transport, storage and sales of dairy products to pay the suppliers to the business, the farmers.

Fonterra's 14,000 farmer-suppliers also have another payment stream; the annual revaluation of their dairy co-operative shares, which will reflect the co-operative's asset- building activities in markets, brands and facilities.

Recently they were sent a booklet called Working with a fair-value share, which explains terms in Fonterra's "new economics" and guides them through a calculation of "total shareholder return." This is analogous to return on investment.

The rapid rise in dairy share values in recent years, from their nominal values in the mid-1990s to around $2/kg milksolids supplied two years ago to nearly $5 today, has created a new asset base for farmers.

It is worth about 20% of the total dairy farm and livestock package, or an average of $340,000, against which the farmers can now borrow up to 100% of value.

Bank of New Zealand has extended to all of Fonterra a new lending product trialled with Kiwi Co-operative last year. It is open to all suppliers, regardless of primary lender.

The Farm First Dairy Share Loan is secured against the value of dairy shares and peak notes, and repayments are deducted by Fonterra from the monthly milk cheques.

Banks hitherto lent up to 70% of the value of land and buildings and 50% of livestock. Farm accountants say the new values of dairy shares tend to get amalgamated into the real estate market price of dairy farms, which are often expressed in dollars per kilogram of milksolids produced in the most recent full season.

BNZ rural business marketing manager Tim Deane said farmers had been borrowing against their share values to re-invest on the farm or to take up off-farm opportunities.

The interest rates on the new loan product include 6.4% floating and 6.15% fixed for six months.

"However, this is not a price play, but a genuinely new product for BNZ and a new opportunity for dairy farmers," he said.

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