11 Jul 2018

Farmers face possible one percent loss over Fonterra disagreement

3:45 pm on 11 July 2018

Farmers face a potential one percent loss of earnings from a disagreement over Fonterra's internal financing, an economic consultancy studying the dairy industry says.

No caption

A report done for the Commerce Commission has found Fonterra was underestimating its risk in the marketplace. Photo: rnz

However, many of the farmers could make up that loss elsewhere.

The argument has come up after a report found Fonterra was underestimating its risk in the marketplace.

The report was done for the Commerce Commission, and referred to a method of assessing a company's risk, known in economic jargon as an asset beta.

That report said Fonterra's asset beta was too low - if it had a proper assesssment of its own risk, then it would have to pay farmers less for their milk in order to shore up its own balance sheet.

Financal consultants TDB Advisory analyst Philip Barry has worked out what that would mean for the people in their gumboots.

"We think roughly increasing the asset beta to the level that the Commerce Commission was looking at would have an impact of around 3c to 5c a kilograme of milk solids," he said.

"To put that into perspective relative to the payout of roughly $6.75 this year, that is a one percent (loss)."

Mr Barry said that loss could be neutralised for some farmers if Fonterra's stronger balance sheet led to higher dividends from the company.

However, non-farmer shareholders could receive a net gain, with no loss, since they produced no milk, and so did not depend on the farm-gate price.

They would simply enjoy a better dividend.

There was a bigger issue at stake than just who got a bigger share of the pie, it was a matter of getting a better return from Fonterra in the first place, Mr Barry said.

"It's not a question of how we slice that pie up, the bigger question is how do we grow the overall pie," he said.

"That is really a matter of getting Fonterra to make a decent return on its investments."

Mr Barry said that return was just 7 percent for Fonterra, compared with Synlait's 9 percent, Open Dairy's 11 percent and Tatua's 18 percent.

Get the new RNZ app

for ad-free news and current affairs