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Growing Fonterra

Media Release
6 December 2009

Growing Fonterra

Federated Farmers welcomes Fonterra’s announcement of an annual retention but believes the amount retained by the cooperative is far too small.

“A high growth cooperative should retain at least 60 percent of its distributable profit,” says Lachlan McKenzie, Federated Farmers Dairy chairperson.

“Fonterra is this year forecasting a distributable profit of around 35 to 45 cents a share and targeting a dividend – or value return – of approximately 20 to 30 cents a share.

“In dollar terms, that’s a retention of just 5 to 15 cents, leaving our cooperative with a measly amount of capital to invest in growth.

“There is quite simply no point in giving shareholders a return of 20 to 30 cents a share, when Fonterra could instead use the profit to grow and emerge as an even bigger player on the world market. That would benefit farmers far more in the long run.

“While the retention policy, introduced as part of its capital restructure plan, has the potential to raise $1.3 billion in new capital, our cooperative could raise even more if it retained 60 percent of its profits.

“A profit retention of up to 60 percent is ‘business as usual’ for any other big company that desires large scale and high value growth, so why not Fonterra as well?

“Fonterra’s new share valuation method may mean farmers shares in the cooperative are worth 25 percent less than under the current method. But to me, this just indicates the previous shares were overvalued, as there has always been restricted trading.

“Yet the decrease won’t sit well with farmers who have expanded their businesses to buy shares at the higher value.

“Federated Farmers now wants the banks to ensure they look after those farmers who expanded to buy shares at the higher value. The banks need to understand that, in spite of the drop in share value, the most important thing to these farmers is cashflow.

“With the increased milksolids payout, these farmers are now in a considerably better position, cashflow wise, than they were earlier this year. The banks need to cut farmers a little slack while the market continues to firm if this month’s GlobalDairyTrade (GDT) result is anything to go by.

“This growth is badly needed to keep at bay the effects of the high Kiwi dollar and a poor season production-wise,” Mr McKenzie concluded.


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