KEY POINTS:
Dairy Equity Ltd, a listed company set up to earn money indirectly from Fonterra shares, today warned the giant cooperative's shareholders may not receive any further value-added payments for the season ended May 31.
Dairy Equity chairman Peter Jensen said today it looked likely Fonterra would go ahead with plans to retain 30c/kg of payout to farmers, but it would take the money from dividends paid on value-added production, such as fast-moving consumer goods and some specialised ingredients.
It was likely to leave alone the record milk price which has already been promised to farmers, Jensen predicted.
On May 30, Fonterra jumped the farmer payout to a record $7.90 for the 2007-08 season, including 35c/kg as a value-added component, and announced an initial forecast for 2008-09 of $7.00/kg.
The country's biggest company also said it would retain 30c/kg of this season's payout as insurance against volatile markets - effectively holding back more than $30,000 from the "average" farmers among its 10,711 shareholders.
"Dairy Equities understands that any retention will come from value-added earnings and not the milk price," Jensen said.
This meant that Fonterra was looking at retaining 86 per cent of the forecast 35c/kg added value payment.
Dairy Equity raised $92 million last August to invest in Fonterra. It managed to buy $21m of beneficial shares, so that it could take money from value-added payments and increases in share values.
But Jensen said that since Fonterra has already paid out 5c/kg of its forecast value-added earnings, shareholders were unlikely to get any more from those operations in the 2008 season, unless earnings turned out to be higher than forecast.
"A 30c/kg milksolids retention will cost Dairy Equities $880,000 (about 2c/share) in lost income this financial year after allowing for drought-related production shortfalls," he said.
Normally loss of income to retentions would be offset by a corresponding increase in the value of the fair value shares, but because Fonterra has already set the new season share price it will be June 2009 before it is able to boost the share price to reflect the value of retentions.
"In the meantime, this unrecognised value will sit in limbo," he said. "This season's fair value share price will be fundamentally wrong (too low) resulting in an inequitable transfer of wealth between shareholders".
"Farmers who are currently in the process of redeeming shares permanently will get around 30c/share less than they should and those who are temporarily over-shared as a consequence of last season's drought are being paid around 30c too much to adjust their holdings."
Jensen said that if Fonterra retained 30c/kg of last season's value-added earnings, Dairy Equities was likely to permanently lose about $255,000 on the sale/redemption of the beneficial interest in about 895,000 fair value shares it sold.
Similarly, if Dairy Equities sold the balance of its Fonterra investment (about 2.25 million shares) before June 2009 at the current share price, it stood to lose around a further $625,000.
In May, Dairy Equity said the announcement by Fonterra that it was reducing the cooperative's share price for the 2009 season by $1.22 a share (from $6.79 to $5.57) would slash Dairy Equities' share asset value by $2.1 million. The 2009 season started on June 1, 2008.
Fonterra is changing its balance date from May 31 to July 31, and its final payout for the 2007-2008 season will be based on the cooperative's performance to the end of July, though it will be paid on milksolids supplied to the normal end of the season at May 31 2008.
- NZPA
