Payout 6.05 – after retentions
Payout $6.05 – after retentions
Fonterra has confirmed that farmers are on track for
$6.05/kg milksolids (MS) this season, after retentions.
Fonterra chairman Sir Henry van der Heyden said he was
comfortable with the figure, which would be in effect a $6.20/kg payout, minus
retentions of 15c/kg. The retention figure is in line with Fonterra’s
projection of retaining 25-35 percent of distributable profit, which this year
it is forecasting will be between 35c-45c/kg.
The news will be welcomed by farmers contemplating the
purchase of additional dry shares and coming to grips with the new corporatised
language of the cooperative. The value-add portion of payout now becomes
“distributable profit” from which retentions can be taken, leaving the
dividend.
Total payout is made up of milk price, calculated mainly on
returns for milkpowders, plus the distributable profit minus any retentions.
“From now on you’ll see us use this language consistently.
We’ll be living and breathing it,” van der Heyden said
“Farmers should be making decisions for their farm and milk
production based on milk price, so decisions around the cost of milk production
are based on milk price, not payout.”
He said that since the early November payout announcement,
it had sold its UK joint venture with Arla, adding to the profit component of
payout.
‘Jumping around’
The milk price component was “jumping around” at the moment,
but the expectation was that farmers would end up with $6.05/kg.
The distributable profit and dividend returns as well as the
change in share price will be what the co-op looks at when making investment decisions
for dry shares, he said.
Fonterra’s 10,500 farmers have until January 15 to decide on
buying 260m additional shares now available after the vote in favour of steps
one and two in the capital restructure process.
Farmers can now hold up to 120 percent of their supply as
Fonterra shares with the share price held at $4.52 until the valuation, based
on a restricted trading market, catches up.
Dry shares or investment shares (those not backed by milk
supply) will receive a dividend which, based on Fonterra’s recently released
dividend/retentions policy, is targeted to be 65-75 percent of distributable
profit. This year’s forecast dividend is 20c to 30c.
Board discretion
Retention of distributable profit is at the discretion of
the board. This season it amounts to around 15c/kg MS, but van der Heyden said
in lower payout years the company would reduce the percentage held back.
“The board must retain flexibility," he said.
"We’ve got to find a balance between farmers’ position,
our young people particularly, and the balance sheet of the company.”
A retention of 15c would add around $195m to Fonterra’s
balance sheet, based on supply of around 1.3b kg MS.
Fonterra Shareholders’ Council (FSC) chairman Blue Read has
welcomed the board’s development of a retention policy.
“It gives farmers the information they need to make their
discretionary investment decisions,” he said.
However, farmers too will have to make sure they understand
Fonterra’s business well and know what is driving the various aspects of their
payments.
Balance sheet
Lincoln University professor of farm management Keith
Woodford said the level of retention won’t give the capital needed for growth,
which will have to come from dry share investment. Retaining a greater
percentage of profit, as advocated by Federated Farmers, would reduce the
dividend and turn farmers away from buying dry shares.
At the predicted dividend level, farmers would receive an
annualised dry share return of seven to 10 percent.
Fonterra has retained an average of 8.5c/kg MS, ranging from
4.5c in its first year to 25c in 2005, for a total of $694m over eight years.
Redemption risk
“Holding the share value until the discounted
restricted-trading value catches up with the current season’s share value is
the only part of the capital restructuring so far that has any impact on
redemption risk,” Woodford said.
“But that won’t be fully addressed until trading among
farmers is implemented. That’s going to be a huge step and is going to involve
a lot of discussion as it takes the redemption risk off the cooperative and
puts it onto farmers’ own balance sheets.”
Fonterra will be hoping step three happens around the same
time as the restricted share valuation catches up with the frozen $4.52 share
value, otherwise it’s again vulnerable to increasing redemption risk as share
value rises.
But Federated Farmers Dairy section chairman Lachlan
McKenzie said that if Fonterra had averaged 20c/kg MS retentions over the past
eight years, it would have taken in $1.88b of additional equity.
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