Fonterra's need for capital a problem

Charlie Pedersen. Photo / Mark Mitchell

Fonterra will have to look to its farmers for more capital now a market listing is officially off its capital restructure agenda - but the country's major rural lender says the average dairy farmer is not in a strong position to contribute.

ANZ National rural general manager Charlie Graham said many farmers were already borrowing extra to meet Fonterra's share buy requirements this season, which meant more debt being sheeted into the industry.

The bank was "fairly neutral" about Fonterra's decision against a market listing, but the co-operative's capital structure had been discussed by bankers when farmer-shareholders threw out a 2007 restructuring proposal which involved a partial listing, Graham said.

The consensus then had been that Fonterra would unquestionably need more capital in future, and that it would be unfortunate if it had to raise it in tight economic times when backs were against the wall, he said.

Fonterra directors will unveil their latest capital restructure plans on September 18, in a year that has seen commodity prices plunge by 50 per cent, payouts slide, and bank credit lines all but vapourise after the global economic crisis.

But two months of increases in Fonterra's average wholemilk prices on its global online auction have generated new optimism that consumer demand is returning to the market.

Meanwhile, most farmers contacted by the Business Herald welcomed the announcement by Fonterra chairman Sir Henry van der Heyden that a market listing was off the table. They said the Fonterra board had this time listened to their message that the co-operative must remain 100 per cent farmer-controlled and owned.

But Manawatu dairy farmer and former Federated Farmers president Charlie Pedersen said although he applauded directors for their "gutsy" move in abandoning a market listing, Fonterra shareholders needed to rethink the way they paid themselves.

Fonterra is capital-starved and has a gearing problem because it has to pay out most of its earnings to farmers in a pooled averaged milk price each year.

Retentions have been low and in some years zero. Its debt gearing rose to 61.5 per cent at the start of this year, but is understood to have eased nearer to 50 per cent. Its annual result is expected this month.

"The system isn't broken but it's breaking down. We have to have a review and ask ourselves what are we going to do about it?" Pedersen said.

The record payout of $7.90/kg milksolids ($9.1 billion) last year had done the industry considerable harm by pushing up the price of everything, including land.