Fonterra’s $3.2b capital return to farmers set to boost rural incomes and NZ economy
According to ASB, Fonterra's plan to sell it's Anchor and Mainlands brands could inject $4.5 billion in additional spending into the economy.
“We don’t believe that will be in the too distant future so we are providing a buffer by dragging forward future higher milk prices to this period we are in now,” Wilson says.
Fonterra says it is supporting farmers in a simple manner with simple documentation and process, “to assist our farmers to buffer what is undoubtedly extreme volatility that is knocking [them] around right now; we are uniquely placed to be able to provide that support over this time.”
All Fonterra share-backed farmers can apply for the support of 50 cents per shared-up milk solids for production for the season. This payment, interest free for two years, will be repayable when the farmgate milk price or advance rate goes above $6/kgMS. A first payment will be made in October for June-December and will continue until May. Payments will total 50c cents per shared-up milk solids over the season but will be phased from October.
It will cost about $430 million and will be funded by one-off savings generated by changes the business is making – its ‘transformation project’ -- such as improving working capital.
Fonterra chief executive Theo Spierings says global demographics long term still show a strong position for dairy. Fonterra still sees the ‘average’ milk price rising to $3500/t (whole milk powder) and, depending on where the NZ$ sits, $6-$6.25/kgMS as the normal level.
The co-op still expects an uplift throughout the season and though $3500/t levels “will take a while, our estimate is it will take 6-12 months,” Spierings says.
Wilson says looking at the history of volatility cycles they are comfortable with interest free lending on the Fonterra Cooperative Support over the next two years. “If required beyond that we would impose a wholesale bank rate.”
Spierings claims dairy prices are way below intervention levels in Europe and “already below the bottom”.
Wilson says these prices are unsustainable for New Zealand farmers but, increasingly, prices globally are also unsustainable in other world regions. “They are now below intervention prices. While there is demand, the reality is we are expecting milk supply will start to tighten over the next quarter to half year.”
Spierings says the loans to farmers will be funded solely by reducing working capital via the transformation programme which will strengthen the balance sheet.
Wilson says the Fonterra Coop Support has been created by one-off gains -- “predominantly working capital gains which strengthen our balance sheet so we are able to use that strength to pass a one-off to our farmers”. “This is different from what is also occurring in our transformation project which you will see reflected in our dividend announcement for the year ahead in September.”
Wilson says there are strong communication levels between Fonterra and the banks and strong support from banks for farmers. “We’ve got an opportunity to very simply provide support for our farmers which reflects the volatility, which reflects how low these prices are vs where they have been historically, and also the fact they are at an unsustainably low point.
“This is putting something in place which is simple to do but which leverages off the strength of our cooperative.”
A Fonterra Co-operative Support schedule will be made available as part of the application process. The programme will be reviewed in December.
