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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A capital restructure of NZ’s biggest company Fonterra got underway today with farmer-shareholders voting in stages one and two of a three stage rejig at their annual meeting reports Stuff. Shareholders voted 89 per cent in favour of a proposed first step to offer farmers the opportunity to buy 20 per cent more shares, unconnected to milk supply. The proposal required 75 per cent support. This first stage clears the way for the Fonterra board to raise up to $900 million a year more for the capital starved dairy cooperative.

More than 89 per cent of shareholders also approved the second stage proposal, which see their shares revalued to reflect they are not freely-tradeable on the market. The favourable voting will enable Fonterra, which had revenues last year of $16 billion, to forge ahead next year with a stage three proposal to introduce share trading among farmers, releasing Fonterra from the capital-draining obligation to redeem the value of a farmer’s shares when they exit the company for whatever reason.

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Fonterra shareholders look set this week to approve the first two of three steps of its capital restructuring proposal, but resistance to the third stage, which will be considered next year, is already evident reports The ODT.  Farmer attention has already being drawn to that contentious third step, the trading of shares among farmers, which will not be debated at Wednesday’s annual meeting in Ashburton.

Company and farming leaders appear confident the initial vote on the first two stages – strengthening the share structure and restricting the value of company shares – would get the required support of 75% of voters.  Some have questioned whether Fonterra would achieve its goal of attracting extra capital from shareholders, with farmers more likely to use income from higher milk prices to reduce debt and restore cashflow than buy extra shares.

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The 19% increase in Fonterra’s forecast payout will lift dairy farmers’ incomes by between $1.2 billion and $1.3 billion, economists say, but how much it boosts the wider economy will depend on how much they allocate to reducing debt reports The NZ Herald. Fonterra lifted its forecast payout to farmers to $6.05 per kilogram of milksolids, up from the $5.10 announced in September.

ANZ National Bank economist Kevin Wilson said the increase would return the sector to profitability and reduce stress levels. But with the dairy sector’s debt levels having increased by around $4 billion over the past year, debt repayment would be uppermost in many farmers’ minds, he said.

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