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Fonterra's Monaghan pans dairy doomsayers, defends debt

Fonterra director John Monaghan pans dairy doomsayers, defends cooperative's debt level

By Fiona Rotherham

Sept. 14 (BusinessDesk) - Fonterra Cooperative Group director John Monaghan said critics who claim dairy is doomed, and the economy with it, show a lack of understanding of the market and the structure of the dairy company.

Monaghan told the New Zealand Shareholders Association conference at the weekend that the news was full of gloomy predictions with falling global dairy prices that not only was it the end of the golden weather for dairy farmers, but also the end of the industry.

“Farmers are worried, anyone would be when their incomes are halved in the course of a year,” he said. “The US, Europe and Australia will have to consolidate and learn to live without subsidies but we’ve already done the hard yards and the cooperative is in the best position to weather the storm and come out the other side. Dairy is not doomed or dead.”

Investors were told the high level of debt carried by Fonterra and dairy farms was a major concern to the New Zealand economy.

Paul Glass, director of Devon Funds Management, told the conference that Fonterra was heavily indebted with $7 billion of debt and less than $1 billion of earnings

Farmer debt had also risen significantly in the past 12 years to about $35 billion, with the average dairy farmer holding $18.90 of debt per kilogram of milk solids, Glass said. Given the farmgate milk price is likely to be, on an optimistic forecast, about $4/kgMS this season, he said that’s a really high level of debt versus revenue, let alone earnings.

Monaghan said while dairy farm debt had trebled since 2003, the asset base had quadrupled over the same time. He said 10 percent of farmers held 30 percent of the overall debt.

“Some of the most indebted farmers have the most efficient, lowest cost of production and an ability to service that debt better than others," he said. "The banks have looked at this and shown confidence in it.”

Economist Shamubeel Eaqub also questioned why Fonterra management took on so much debt ahead of the massive downturn in commodity prices and why they hadn’t seen it coming.

Fonterra’s debt-to-equity ratio is 50.7 percent, up 2.2 percent on four years ago, which Monaghan says is within the company's policy range of 44 percent and 55 percent. He’s confident with where the debt is sitting, given the $2.3 billion of regional investment in infrastructure Fonterra had made in the past three years to deal with the volume of milk it has to handle.

Critics say Fonterra’s earnings have not kept pace with growth in the dairy sector. But Monaghan said people shouldn’t listen to the doomsayers that say you can’t add value to milk powder. He said since its formation 14 years ago, Fonterra has grown its ingredients business from $7.9 billion to $16 billion while the consumer and food services business, which is growing at 6 percent per annum, has gone from $4.66 billion to $6 billion.

To give those figures some perspective in New Zealand, he said “the consumer food services business has 28 percent more revenue than Air New Zealand and 80 percent more than Spark in 2014".

With the latest two GlobalDairyTrade auctions showing an increase in prices, Monaghan said optimism was growing but it wasn’t time to open the champagne yet. Dairy prices were predicted to hit the US$3,500 per kilogram of milk solids within the next 12 months, while global demand was forecast to increase 2-to-3 percent and milk production in New Zealand likely to drop 2-to-3 percent, he said.


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