Fonterra wants other large dairy companies to join its website auction for milk powder reports The Manawatu Standard. The co-operative is now selling about 20 per cent of the milk powder it produces on globalDairyTrade, but it wants to expand the web-selling mechanism. The trade manager of globalDairyTrade, Paul Grave, said web sales were a tool to manage global uncertainty over dairy prices.

“In forward sales, someone wins and someone loses. If a customer loses, they are not happy and Fonterra doesn’t want an unhappy customer. If Fonterra loses, our shareholders aren’t happy.” The price of milk powder used to change by a few hundred United States dollars a month, but now it can be US$600, Mr Grave said. “We can’t live with those fluctuations.”

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Fonterra says it has lifted its “distributable profit” forecast by 5c for the current 2009-2010 season to between 40c to 50c a share – but doesn’t plan to pass on the extra earnings to its 10,500 farmers. Distributable profit is the total surplus from Fonterra’s business available for distribution to farmer shareholders by way of dividend, and was previously estimated last December at 35c to 45c a share.

The company said today it was making no change to the “target dividend range” of 20c to 30c a share. “This would indicate 10c to 30c a share…will be retained,” it said. The forecast milk price of $5.70/kg milksolids for the season is also unchanged .

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The world’s largest milk-powder dryer, costing $212 million, was opened  at Edendale in Southland as part of Fonterra’s strengthening of infrastructure, with more South Island developments to follow. Fonterra has a rolling plan to upgrade its plants and warehouses, and the milk-powder dryer, ED4, capable of producing 27 tonnes of milk powder an hour, will increase Fonterra’s national production by more than 10 per cent to 1.1 million tonnes a year.

The Edendale dryer coincides with dairying growth in the South Island of between 6 per cent and 7 per cent over the past year. Fonterra trade and operations managing director Gary Romano said the South Island represented one-third of Fonterra’s milk manufacturing reports Stuff.

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Dairy giant Fonterra is extending its reach into China, negotiating to lease land by mid-year for two more NZ -style dairy farms in the world’s largest emerging dairy market. Fonterra China managing director Philip Turner said with the firm’s pilot farm in Hangu, in Hebei province, performing profitably ahead of schedule and producing record levels of milk, the time was right for further investment.

The China dairy market is forecast to show double-digit annual growth over the next 10 years reports Stuff. The domestic dairy industry was developing quickly but the current supply of high-quality fresh milk could not keep up with demand, Mr Turner said from Beijing. “Some of the big companies are running large-scale production facilities of their own but the number of farms in China at our level of quality and safety of milk production would be under 20.”

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The price of whole milk powder fell for a second month in Fonterra Cooperative Group’s online trading auction amid expectations of increased output from northern hemisphere producers reports Stuff. The average price for whole milk powder fell 1.6% to US$3,256 a tonne, according to the globalDairyTrade website managed by CRA International.The price of anhydrous milk fat dropped 7.9% to US$4,183 a tonne.

“This result is positive given that over the last month dairy prices have been under pressure in Europe and the US,” said Paul Grave, globalDairyTrade manager. Prices are still high by historical standards, he said. The price decline in consistent with the ANZ Commodity Price Index, released yesterday, which showed dairy prices dropped 2% in January while most other New Zealand commodities gained.

SI farmers bought most of the $271 million Fonterra dry share issue.The co-operative says South Island farmers collectively purchased a total of 30 million of the $4.52 shares, to a total value of $135.6 million.Central South Island was the biggest purchasing region, buying up 17 million shares reports The Taranaki Daily. Federated Farmers is applauding the $271 million invested in the co-operative by Fonterra’s farmer-shareholders. “In less than stellar economic times, around one-third of Fonterra Co-operative Group’s shareholders have ’shared-up’,” says Lachlan McKenzie.

“The $271 million raised will become udders containing over half a billion dollars when bank facilities are leveraged off it. That’s a sizeable amount from which to look at acquisitions that will add value to the co- operative’s financial performance. “The federation now wants to see Fonterra develop a retentions policy that will build on this war chest. While there’s been much uninformed comment on Fonterra’s debt, the co- operative’s debt-to-debt plus equity ratio trajectory is tracking back to board guidelines of 45-55 per cent.

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Fonterra’s constitution will eventually have to be re-written to allow for overseas investment if the co-operative ever wants to be a truly global player, a leading academic says. Fonterra yesterday revealed it had gained NZ$270.7 million in new equity through the purchase of additional shares offered to its farmers late last year.

Waikato University chairman of finance Stuart Locke said the fact that Fonterra had only been able to raise NZ$270 million meant overseas investment in the co-operative was now inevitable. “If the are to be a major player in the world market they need a lot more equity,” Locke said. Locke compared Kraft’s US$26 billion buyout of Cadbury with the farmers’ NZ$270.7 million share purchase, saying it paled in comparison writes The NZ Herald.

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Around one third of Fonterra’s farmer shareholders have spent $270.7 million buying up new shares in their co-operative as part of changes to its capital structure. Fonterra’s farmer shareholders have been given the opportunity to adjust their shareholding up or down, to anywhere between 100 and 120 per cent of their current or expected production, at a price of $4.52 per share.

In November nearly 90 per cent of Fonterra farmers voted in favour of allowing themselves to buy into an extra 20 per cent of the co-operative. The move came as part of a three-stage restructuring of the business, as Fonterra said it required more capital to address risks to its balance sheet caused by farmers cashing in their redeemable shares reports The NZ Herald. The new shares would also help Fonterra’s global and domestic growth. Previously, Fonterra farmers were only able to buy one share for every kilogram of milk solids they produced.

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Half of farmers won’t be able to afford to buy the additional shares being offered by Fonterra from today, farmer lobby group Federated Farmers says. Fonterra’s farmer owners voted in favour of allowing themselves to take up an extra 20 per cent in the co-operative last month as part of a three-stage capital restructure of the business. Fonterra needs more capital to address the risk to its balance sheet of its farmers cashing in their redeemable shares, and to fund global and domestic growth ambitions.

At the moment its 11,000 farmers must buy one share for every kilogram of milk solids they produce but the change allows them to take up an extra 20 per cent of “dry” shares which don’t have voting rights but will be eligible for a value-add dividend payment. Federated Farmers dairy chairman Lachlan McKenzie said he didn’t expect farmers to be rushing to buy the shares straight away because many had yet to receive all the information reports The NZ Herald.

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Surging dairy prices are ripe for a fall early next year when European and American farmers resume production. Until then, Fonterra wants to iron out the increasingly volatile market reports Stuff.  Fonterra managing director of global trade Kelvin Wickham says the giant dairy co-operative is “happy to be realising gains in the market”, but a pickup in supply when European and American farmers come on board will test the demand level in emerging markets and probably lead to a fall in dairy prices.

“Prices have moved above long-term sustainable levels. It’s about that point where these prices are interesting for farmers to produce milk,” Wickham says. The price of Fonterra’s milksolids jumped to a 13-month high on Fonterra’s dairy auction website globalDairyTrade, and have surged some 88 per cent from their low in July. Dairy prices have climbed for seven straight months and are 44 per cent stronger than their low in February, according to ANZ’s Commodity Price Index.

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