The high level of debt carried by Fonterra and dairy farms is a major concern for the New Zealand economy, said speakers at the annual New Zealand Shareholders Association conference.
Paul Glass, director of Devon Funds Management, told the NZSA conference in Hamilton Saturday that Fonterra, the world’s largest dairy exporter, had $7 billion of debt and less than $1 billion of earnings, NewsNow reported.
“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 $35 billion, with the average dairy farmer holding $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.
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 unit-holders in the company. Fonterra has forecast a dividend to shareholders, including unit-holders, in the range of 40 to 50 cents for this season, reflecting the lower input costs of milk on the value add good it produces.
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.
