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Fonterra's innocuously worded ''Global Dairy Update'', released on Monday, provided another shock to Fonterra Shareholder Fund (FSF) unit holders, Milford Funds senior analyst Brooke Bone says.
The announcement brought into clear focus the diverging fortunes of two key stakeholders of Fonterra - shareholders who can only be farmers and the unit holders of FSF. The current milk price forecast, at $8.30, would be the highest on record. Unusually, the high prices combined with the highest volume of milk production on record, currently up 4.7% year on year.
On-farm revenues should reach record levels during 2014. However, over the past six months, the units in the FSF have under performed the NZX-50 gross index by 19%. Mr Bone questioned why there had been such a divergence.
''The Global Dairy Update noted increased transparency around NZ Milk Products would result in a margin squeeze and a $157 million charge to inventory. In effect, Fonterra has paid a price to farmer shareholders through the milk price it will not be able to recover when the product is sold to customers.''
That would decrease the net profit after tax of Fonterra, which paid dividends to unit holders and shareholder farmers. The impact of those movements saw two brokers cut their 2014 after-tax profit forecast for Fonterra by about 55%, he said.
There were two key issues for unit holders. As milk prices increased rapidly, the cost of goods sold to Fonterra also increased, putting downward pressure on earnings. The cost of raw milk - paid to farmer shareholders - was the single largest expense of the co-operative.
The second issue was the way the milk price manual was constructed, which could result in variations in the prices paid to farmers, compared to the prices Fonterra could charge customers. The variations created a large amount of volatility in earnings. Analysts and Fonterra could not forecast these differences in what they called ''stream profitability'', Mr Bone said.
''There is a silver lining for unit holders at the moment, but this could reverse in the future. With the outlook for on-farm cash flow looking exceptionally strong, and the requirement for farmers to 'share up', there has been increased buying of shares by farmers, even in the face of the downgraded earnings outlook.''
The result was the FSF unit price fell just 2.9%, when 2014 net profit forecasts were cut by about 55%.
''While this may seem to be a no-lose situation for investors, we are wary of financial structures which do not behave in a logical manner for periods of time, as they can often quickly and painfully revert when situations change,'' Mr Bone said.