Units in the Fonterra Shareholders Fund hit a record high this week despite ongoing increases in dairy product prices - prompting some in the industry to question whether investors fully understand the factors at work.
The units give investors access to Fonterra's dividend flow but do not confer share ownership in the co-operative. They are designed to reflect Fonterra's performance as a manufacturer of dairy products. Historically, high milk prices have tended to drive the dividend lower.
The strength of prices in the GlobalDairyTrade (GDT) auction translates into higher milk prices - which is a cost to the manufacturing side of Fonterra. But since its debut on the NZX last November, the price of the units has gone ballistic, much to everyone's surprise, because GDT prices have rallied.
Last month, the average winning price hit US$4968 a tonne in the GDT auction - the highest since the trading platform started in July 2008.
In November, the units were priced at the top end of the $4.60 to $5.50 range. In the build-up to the initial public offer, it became clear that investor demand was much stronger than expected.
The units first traded on the NZX on November 30 at $6.66 - a 30 per cent premium to their issue price.
On Thursday, the units hit their highest-ever point of $8.06 after Fonterra announced a management shakeout aimed at savings of up to $65 million a year.
Fizz in the unit price has filtered through into the shares in Fonterra, which farmers need to buy upon entry to the co-operative or when they want to increase production.
Some farmers have complained that the strength of the shares could form a barrier for new farmers setting up shop or for those wanting to raise their output.
Federated Farmers Waikato section chairman Chris Lewis said the dividend side of Fonterra's business had to pay a lot more for its milk when commodities prices firm.
Historically, a lower milk price has tended to translate to higher dividend and vice versa, Lewis said.
"I think the share market may not have done its homework ... on this yet, to understand what actually happens in the cycle of milk products."
Forsyth Barr said the $65 million cost savings announced this week was unexpectedly high. However, in light of the strong run-up in the unit price, the brokerage maintained its "reduce" recommendation.
In a research note, Forsyth Barr said the Fonterra Shareholders' Fund (FSF) was a complex investment mechanism for a complex underlying business, and that the units were trading at above their intrinsic value.
Forsyth Barr said it had upgraded its "target" price for the units to $7.30 from $6.50 - still well short of yesterday's closing price of $7.90.
David Stanley, a research analyst at Wellington-based boutique investment banking firm Woodward Partners, said investors were still getting to know Fonterra and its key drivers and that the market was grappling with the relationship between the milk price and the unit price.
"Most of us are surprised at how strong the unit price price is," he said.
He said the price reflected expectations over and above what has been announced by Fonterra. "And I think that it reflects very high expectations of their ability to achieve growth in the emerging markets, particularly in China and Asia," he said.
In an interview, Fonterra chairman John Wilson said Fonterra's view was that it would take until the latter part of 2013 before the market became fully functional.