Fonterra urges new PM to continue push for trade deals

Milk tankers stand at a Fonterra Cooperative Group Ltd. factory in Kauri. Photo / File
Milk tankers stand at a Fonterra Cooperative Group Ltd. factory in Kauri. Photo / File

Fonterra chairman John Wilson has told investors in the cooperative’s unit fund that it’s critical the government continues driving regional and multi-lateral trade agreements.

At the annual meeting of the Fonterra Shareholders Fund, Wilson said he had gone on a number of trade missions with former Prime Minister John Key, who he said was a strong supporter and advocate of the New Zealand dairy industry.

“With his departure, it is critical that we continue to work closely with government to ensure trade strategy adapts to the changing global environment that has certainly seen significant political change during 2016,” he said.

While the controversial Trans Pacific Partnership (TPP) agreement has stalled with Donald Trump’s election in the US, Wilson is hopeful it can be rejuvenated in some form next year given the fundamentals that drove it haven’t changed.

“Clearly right now it’s not going anywhere but it will be very interesting to see how the countries involved in TPP and other countries in the region look to come together, I believe over the next 12 months.”

He’s confident the new prime minister and key ministers will pick up Key’s trade mantle, with particular focus on the World Trade Organisation and a new free trade agreement with Europe given Britain’s vote to leave the EU.

Fonterra confirmed its farmgate milk price forecast of $6 per kilogram of milksolids today and Wilson said it was still confident of delivering on the forecast 50 to 60 cents earnings per share which would deliver a final total payout of $6.40/kgMS, despite rising milk prices compressing the cooperative’s margins.

The rebalancing of supply which has seen Australian and European farmers cut back their growth rates is expected to continue over the next 12 months, he said.

“We’re 95 per cent exporters, the US is 15 per cent, and Europe, depending on the year, is around 5 per cent so what you find is there is a significant lead in lag period and you’ve seen the same pain our farmers have gone through over the last two years now being experienced by many other farmers globally and we have seen a reduction in supply and the market come back in balance.”

Wilson predicts it will take two years for kiwi farmers to recover from the last two difficult seasons, given incomes will be affected by the 5.6 per cent drop in milk production locally in the year to date.

Repaying working capital borrowed from the banks and spending on delayed repairs, maintenance and fertiliser are likely to be priorities as incomes increase again this season, he said.

Poor weather, particularly in the North Island, lower stocking rates, and farmers limiting the use of feeding supplements have all had an impact on production and Wilson said he expects it will also take two years for New Zealand production to return to previous levels. He added farmers were being “very careful” because of the price volatility over the past five years that has impacted returns.

Fund chairman John Shewan said last year’s dividend of 40 cents per unit represented a 7.3 percent yield to investors, well up on the previous year, while the size of the fund has increased 20 percent in the past year to 121 million units with a total market capitalisation of $719 million.

The fund now represents 7.6 percent of total Fonterra shares on issue compared to 6.2 per cent last year. In terms of geographical spread, 67 per cent of unitholders are from New Zealand, 21 percent from Australia, and the rest are from the US, UK and Hong Kong.

The number of retail shareholders rose four per cent to 59 per cent during the year and the stock’s liquidity level has been the highest this year since the fund’s launch in 2012 with an average 420,000 units traded per day.

The share price is currently trading at $5.93 with the basic unit price up 7 per cent in the past year, relative to 12 per cent for the NZX50.

Scott St John has been appointed to the board of the Fonterra Shareholders Fund Management company, after being elected to the Fonterra board. He’s replacing Ian Farrelly on both boards who has retired.

- BusinessDesk

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