Fonterra has today mounted a second attempt to persuade its 10,700 shareholder farmers to back a capital restructuring plan. The three-step proposal could take care of Fonterra’s capital needs for about the next five years while retaining farmer control and ownership reports The NZ Herald. Fonterra wants to:

* Allow farmers to hold shares equivalent to 120 per cent of their milk production, a 20 per cent increase, with incentives to hold shares even if their production falls;

* Cut the value of the shares because ownership is restricted to cooperative members;

* Later move to trading of shares between farmers, without them first having to be sold back to the cooperative.

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Fonterra announced today the Co-operative’s total forecast payout for the 2009/10 season remains at $4.55 per kilogram of milksolids (kgMS), with a 10 cent increase in profit compensating for a fall of 10 cents in the Milk Price. Fonterra Chairman, Henry van der Heyden, said the NZ Dollar had strengthened significantly against the US currency since the opening forecast in May this year, which assumed an exchange rate of around US59 cents, and was putting downward pressure on the Milk Price. However, on the positive side, Mr van der Heyden said there were tentative signs of strengthening demand and firming prices for some products in international dairy markets. This had been taken into account in the new forecast Milk Price of $4.00 per kgMS – 10 cents lower than the May forecast of $4.10.

“Along with other exporters, we’ve been hurting with the Kiwi dollar up around 65 cents against the US dollar. The fall in our Milk Price forecast would have been larger if we hadn’t seen what are some early and encouraging signs in international markets. Fonterra CEO, Andrew Ferrier, said the 22 percent increase in the forecast profit from 45 cents to 55 cents was the result of continued improvements in the performance of the consumer businesses and lower working capital requirements and lower funding costs. “Our combined consumer businesses are benefitting from shifts into higher-value products, as well as growth in market share in some areas. In addition, acquisitions in Australia are having a positive impact on earnings.

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Fonterra chair Henry van der Heyden has resigned from his seat on the board of stock exchange operator NZX, to avoid ‘perceptions of potential conflict of interest reports The NZ Herald.” NZX chairman Andrew Harmos said in an announcement that van der Heyden resigned “to remove any perceptions of potential conflict of interest with his role as Fonterra chairman.” “Neither NZX nor Mr van der Heyden believed any such conflict actually exists,” said Harmos. “However, the NZX board understood Mr van der Heyden’s desire to erase any such perceptions, especially as Fonterra shareholders considered important matters relating to the Co-operative’s future capital structure.”

Van der Heyden joined the NZX Board in September 2005 and has been Fonterra chairman since 2002. “Fonterra and New Zealand dairy farming are the most important things to me professionally. Dairying has long been a cornerstone of the economy and I’ve spent a large slice of my working life helping to build a sustainable industry for farmers and one that will remain a strong contributor to our economic prosperity,” said van der Heyden. “Over the coming years, Fonterra shareholders will be making decisions on capital structure that will be of vital importance to the Co-operative and indeed to the national economy. I want to ensure that these deliberations are untainted whatsoever by any concerns about the NZX directorship – no matter how misplaced such concerns might be.”

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Fonterra announced today its first payout forecast for the 2009/10 dairy season was NZ$4.55 per kg of milk solids reports interest.co. This was made up of a milk price of NZ$4.10 and a value added component of 45 cents. Economists were expecting a payout forecast of over NZ$5.00/kg. This forecast was assuming an exchange rate of 59 US cents, Fonterra said. Fonterra also left its forecast for the current dairy season unchanged at NZ$5.20, including a 45 cent value return component made in the final payout at the end of October.

“We were looking at a forecast over NZ$5 when the Kiwi was at 50 (US) cents but the rebound means we’re now working with a dollar that’s 10 cents higher,” Fonterra Chairman Henry van der Heyden said about the 2009/10 forecast.“And, just this week – at a time when we’ve been seeing some tentative signs of recovery in the global dairy market – the US Government has announced export subsidies for their farmers, which is bad news for our farmers,” van der Hayden said.Fonterra also said it had set its fair value share price for 2009/10 at NZ$4.52. This was down NZ$1.05 from the NZ$5.57 price for 2008/2009, and 5 NZcents below the previous forecast in December.

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Fonterra has put the tainted milk affair at its former Sanlu joint venture behind it and is on track to treble its dairy exports to China to about 160,000 tonnes this financial year reports The NZ Herald. Fonterra chairman Henry van der Heyden yesterday confirmed a huge jump in demand as many Chinese opt for foreign milk powder products because they have lost faith in the local product. At Fonterra’s last monthly auction a tonne of milk powder was worth US$2235. At this price, 160,000 tonnes would return NZ$630 million.

Mr van der Heyden now expects Fonterra’s inventory levels will probably be back down to normal seasonal levels by July 31 – the end of the company’s financial year – reducing the need for the dairy co-operative to continue leasing extra warehouse space to house surplus product. While he is reluctant to forecast how long Fonterra expects the jump in Chinese demand to last, he believes it could be for two or three years. “I have no nervousness about the forecast $5.10/kg payout,” he said.

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The melamine in the milk scandal has had a silver lining for Fonterra in the form of a big jump in revenue from Asia. In its half-year result, revenue from Asia, Africa and the Middle East was up 53% to $1.2 billion. CE Andrew Ferrier said increased ingredients sales to China was a major factor. After the crisis , Chinese dairy companies started buying milk from overseas rather than sourcing it locally, he said.That was the largest of three drivers of the increase in Asian revenues. The melamine crisis was also partly responsible for a switch to more expensive foreign dairy products by consumers in Asia, which enabled Fonterra to drive higher revenues.

Gains from the falling kiwi dollar was the third factor. Fonterra reported revenue of $8b for the six months to January 31, up 9.6% on the first half of last year. But a change of balance date last year’s first half ran from June to November meant the two periods were not directly comparable. Adjusting for timing factors and including exchange hedging, Fonterra said revenue would have been down by 7.6% as a result of lower global dairy prices. Debt to equity ratio increased to 61.5% at January 31 from 57.4% at July 31, 2008. The rising debt level was caused by the cost of carrying higher inventories, the falling kiwi dollar and $700 million extra in advance rates paid to farmers, Mr Ferrier said.

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A dairy farming couple’s letter of concern to Fonterra about board and management decisions has grown into a major campaign, with them receiving “hundreds and hundreds” of phone calls writes The ODT. Kevin and Andrea Marsh, of Bay of Plenty, aired their concerns in Farmers Weekly last week and support has been such that they expect to have the required numbers within three weeks to force an extraordinary general meeting of the company. Since August, Fonterra had made decisions which Mrs Marsh said were not expected by a co-operatively owned company, but which seemed designed to strengthen Fonterra’s balance sheet at the expense of farmers’ balance sheets.

Shareholders were angry at Fonterra’s decision to stop accepting milk under contract, meaning farmers had to buy one share for each kg of milk solids (kg/ms) they supplied. Mrs Marsh said there was also anger the co-operative removed the share buffer, which allowed farmers to supply a portion of milk for which they did not own shares. This meant farmers were not penalised if there was a particularly productive season. The payment schedule had also been changed, with settlement payments being made later in the year, affecting farmer cashflows. “All these decisions have put many businesses in precarious positions,” Mrs Marsh said.

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Fonterra has cut its estimated fair value share price by 20 percent, or $1.10, to $4.47 due to the “unprecedented” turmoil in world equity and financial markets and the write-off of its $200 million investment in China’s San Lu reports NZX.

The cut, for the 2009-10 season, follows a $1.22 decline in the previous season. Fonterra chairman Henry van der Heyden also said the tough global economic outlook was a factor in the reduction to the estimated fair value share price. Fonterra said its independent valuer, Duff & Phelps, provided it with a valuation range of $4.14 to $4.80 and the estimated price is the mid-point of that range.

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The relationship between Fonterra’s board and its shareholders is at rock-bottom and an independent facilitator has been brought in to ease tensions. Differences over the cooperative’s future capital structure have fuelled the conflict writes The Rural News.

Fonterra leaders made the admission after concerns were raised by Waikato dairy farmer John Bluett at the cooperative’s annual meeting in Palmerston North last week. Fonterra chairman Henry van der Heyden says there is tension between the board and the council. Heyden told the meeting that an independent facilitator has been brought in to sort out differences.

We all want the same thing out of the cooperative,’ he says.‘The difference is how we get there.’The Co-operative board is under fire for its handling of the capital structure review. Shareholders claim the board’s preferred option was dumped on them without consultation. Farmers have made it clear that retaining ownership and control of the cooperative is a priority

Fonterra is imposing a “severe clampdown” on non-essential spending, freezing staff levels and planning to sell some assets and aggressively cut debt to cope with the global recession.
At Fonterra’s annual meeting in Palmerston North yesterday, attended by about 300 farmers, few questions were asked about its handling of the Chinese melamine-in-the-milk scandal reports Stuff. Chairman Henry van der Heyden said it was likely Fonterra would have to write off the remaining $62 million of its investment in disgraced Chinese company SanLu.

Chief executive Andrew Ferrier said the cooperative would look to sell some assets but this was not related to bringing down debt levels. Fonterra has a debt to debt plus equity ratio of 57% but aims to reduce this to 45% during the next few years. “Although Fonterra’s banking relationships are sound, the world we are in is so unpredictable, it pays to be prudent,” Mr Ferrier said.