Fonterra fund units could fall

The dairy sector may weather the drought better than beef and sheep farmers but Fonterra's recently launched shareholder fund units could take a hit in value.

The units, which began trading on the stock exchange at $6.85 in late November, peaked at $7.49 in mid-January and were yesterday trading at around $6.90.

Craigs Investment Partners broker Peter McIntyre said individual dairy farmers were likely to be harder hit and ''more at risk'' than processors such as Fonterra, as the drought did not hit until after peak milking season and Fonterra expected collection volumes to be 1% up on last year.

''Drought-affected [dairy] farmers may sell dry shares to raise cash. This surplus liquidity is likely to cause weakness in the share price and the Fonterra shareholder fund units,'' he said.

The combination of a new rule requiring farmers to up their number of shares, combined with the recent 1:40 bonus issue, was likely to cause a surplus of shares over the next few months, he said.

The drought is being estimated to cost more than $2 billion in productivity at present, with individual, mainly northern, dairy farmers already estimating their losses in the hundreds of thousands of dollars because of the enforced early end to the season.

Fonterra is due to announce details of its supply offer when delivering its first-half results on March 27.

Mr McIntyre said this would be the first opportunity since the Fonterra unit initial public offer for farmers to convert their wet, production-backed shares into vouchers, to receive the shares at market price.

He said details were ''still unclear'', however Fonterra is able to acquire up to 90 million shares from farmers, and cancel or hold them as Treasury stock.

However, Mr McIntyre said the drought had now made the outlook less positive and he expected the farmer take-up would be ''substantial'' and might exceed the theoretical 90 million-share maximum.

simon.hartley@odt.co.nz

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