Fonterra units still causing confusion to investors

Fonterra's John Wilson backed the fund structure. Photo / Mark Mitchell

Fonterra's NZX-listed units are still causing confusion, two years after their introduction.

The units, which give non-farm investors exposure to Fonterra's dividend flow, came under fire at yesterday's annual meeting of the Fonterra Shareholders Fund, with some unit holders questioning their performance.

Similar themes emerged at Fonterra's annual meeting of farmer/shareholders in Palmerston North on Wednesday.

The fund's chairman, John Shewan, said the units had understandably caused confusion among investors as many had falsely assumed higher milk prices should translate into higher fund returns.

"It's important to recognise that the farmgate milk price is a major cost for Fonterra's business - a major input cost - to the extent that when they go up, it is a major cost to Fonterra's earnings," Shewan told unit holders.

The farmgate milk price is calculated using "reference" products - mostly wholemilk powder, skim milk power, and their derivatives, based on trading on Fonterra's GlobalDairyTrade (GDT) auction platform. GDT prices have come down by just under 50 per cent since February.

"When the farmgate milk price goes up, Fonterra's earnings go down, and there is therefore a reducing impact on the unit price," he said.

"Conversely, when commodities prices reduce the milk price reduces, Fonterra's cost of milk solids goes down and that has a beneficial impact on earnings," he said.

In the 2013/14 year, Fonterra's farmgate milkprice was a record $8.40 per kg of milksolids while the dividend was just 10c. This year, the farmgate milk price is $5.30 a kg and the dividend forecast is 25c to 35c.

Trading Among Farmers and the Fonterra Shareholders Fund was a global first and other co-operatives around the world are looking at similar models for their capital structures.

In Australia, Fonterra's main competitor, Murray Goulburn, is planning to introduce a similar, ASX-listed instrument mid-way through next year.

Fonterra chairman John Wilson said the company was still happy with the way the structure had functioned and that there was little he would want changed if the same instrument was introduced today.

"We have been through this extraordinary volatility with milk powder prices going from US$2500 a tonne to $5000 a tonne, then to $2500 in the space of 18 months," Wilson said.

"On top of that, we have had the WPC80 precautionary market recall, droughts, and Trading Among Farmers has stood up to it extremely well."

The shareholders fund has 121 million units which ranged in price from $5.63 to $6.70. during the year. The units closed up 4c yesterday at $6.16.