Drop the Anchor!
OPINION: A few armchair experts have dumped on Fonterra’s $4.22b sale of its consumer business, but the more your old mate reads about it, the more it seems like a smart move.
But financial services provider Findex says that farmers may not reinvest the payout quite as one might expect.
"The sale of parts of Fonterra to Lactalis for $3.845 billion raises the issue of where that capital injection to the cooperative members might be applied," says Findex Wealth Management partner Craig Smith.
"As is the case with anyone's funds, the answer varies based on individual circumstances. However, we're seeing sentiment turning away from putting that money straight back into the land that producted the payout."
The deal between Fonterra and Lactalis represents a significant financial event for Fonterra shareholders, a substantial number of whom are New Zealand dairy farmers. The transaction could potentially increase to $4.22 billion (with the inclusion of Bega lincences) and is expected to result in a tax-free capital return of $2 per shares. This dividend accrues to shareholders including around 10,000 farmers who are in line to receive a share of approximately $3.2 billion.
"That's obviously an enormous boost for farmers and regional communities," Smith notes. "For instance, a farm producing 100,000 milksolids annually could see a $200,000 payout with most farmers potentially receiving $100,000 to $1,000,000 as a capital injection."
Smith combines the capital injection with observations from the field, which indicates farmers reaching the end of their tether.
Read More:
- Why Fonterra accepted defeat in the dairy aisle
- Strong shareholder mandate needed for Fonterra's $4.22b divestment
- Fonterra consumer business sale price jumps to $4.22b
"We're seeing growing negative sentiment from dairy clients turning away from buying more land, reinvesting in their properties and doubling down into farming after a challenging decade on a number of fronts," he says.
Instead, Smith says there is an apparent appetite for other investments and a move towards diversification.
Cash, of course, provides the ultimate flexibility, and there is no shortage of options available to the “capital flush”. Strategies can include:
- Diversified investments: Farmers can consider diversifying beyond dairy, with multiple instruments available, including equities (share) markets, bonds, managed funds, commercial property or other vehicles. Smith says selections rest on risk appetite and goals. “This helps reduce the highly concentrated risk faced when farmers have all assets and income tied into the farm, a commodity driven business prone to large profitability fluctuations.”
- Farm succession: Individual capital injections may be significant enough to facilitate succession or co-investment plans while providing for the previous generation’s retirement. “The monies could allow for a structured transition of farm ownership or management to the next generation or other parties, ensuring the retiring farmers have a secure financial future independent of daily farm operations,” says Smith.
- Supporting ventures outside farming: The capital presents an opportunity for supporting family members in their personal ambitions. “Not all the children of dairy farmers want to go into farming. The capital can support their entrepreneurial or career aspirations in other sectors, fostering family wealth across diverse fields, leaving rural income and assets supporting the farmer and their own retirement,” notes Smith.
- Debt reduction: Retiring existing debt provides immediate financial relief, improves resilience against future milk price volatility, and reduces exposure to rising interest rates.
- Farm investment: While the obvious path isn’t necessarily the strongest, it remains an option, says Smith. “Reinvesting into the farm infrastructure, technology, or sustainability measures increases long-term efficiency, profitability, and reduces future costs. It is therefore still an important option for many farmers.”
Where Smith’s view is firm, is that the windfall is welcomed by the nation’s rural communities. “It has unquestionably been a tough decade, so the monetary relief is palpable. Farmers now have options to leverage and improve their circumstances, and as always, the decisions ahead require close assessment of potential returns.”
Smith adds that as these discussions and decisions routinely involve the entire/wider family, they can be improved with an impartial facilitator providing financial knowledge, metrics and advice.
