High level of dairy debt major concern

  • 13/09/2015
Fonterra (File)
Fonterra (File)

By Fiona Rotherham

The high level of debt carried by Fonterra Co-operative Group and dairy farms is a major concern for the New Zealand economy, according to speakers at the annual New Zealand Shareholders' Association conference.

Paul Glass, director of Devon Funds Management, told the NZSA conference in Hamilton on Saturday that Fonterra, the world's largest dairy exporter, had $7 billion of debt and less than $1 billion of earnings.

"Most banks will only lend three to four times earnings. Fonterra is very heavily indebted," he said.

Farmer debt had also risen significantly in the past 12 years to about $35b, with the average dairy farmer holding $90 of debt per kilogram of milk solids, Mr 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.

Economist Shamubeel Eaqub told the conference that Fonterra's forecast farmgate milk price of $3.85/kgMS was the lowest ever in real terms and combined with the downturn in the Chinese economy was a "very big deal for New Zealand".

He 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.

He also questioned why it hasn't delivered the value it should have to unitholders in the company.

Fonterra has forecast a dividend to shareholders, including unitholders, in the range of 40 cents to 50 cent for this season, reflecting the lower input costs of milk on the value add good it produces.

Mr Eaqub said the low inflation, low interest rate environment investors now face is likely to continue for a long time, due to excessive capacity in the global market and the impact of faster technological change than ever before.

"I'm confident inflation is not the devil to fear, deflation is more of a concern. The growing youth unemployment and hollowing out of the regions - that's the risks and that's public policy and government which investors have to be mindful of."