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While the $183 million settlement with French dairy giant Danone and $405 million asset writedown of Chinese partner Beingmate grabbed headlines this week, Fonterra’s overall performance has sparked rising concerns with analysts.
Fonterra delivered a $745 million profit a year ago, but this week booked a $196 million loss. Total debt has now risen by $700 million to $6.2 billion.
Fonterra paid only one 10c dividend — down from the 20c forecast — to farmers in April, and canned paying a second.
Federated Farmers’ Otago dairy chairman Matt Korteweg said while the dividend might appear relatively small compared with the farm-gate payout, it was an important component which dairy farmers relied on.
"It’s actually the icing on the cake for many ... it either goes into the local communities or back into the farm [and] pays off debt or for infrastructure upgrades," he said.
The Kortewegs contract and sharemilk two herds of 550 each near Kaitangata.
He said for each kilogram of milksolids produced, one share had to be owned, which tied up a lot of capital for farmers producing 200,000 kg of milksolids, he said.
"If you’re expecting 30c or 40c and get 10c; do the maths," he said.
Mr Korteweg said a Fonterra roadshow is scheduled for September 20 at Balclutha’s Town & Country club, and while RSVPs had just closed, he urged farmers to still sign up.
"With a new chief executive and chairman there’s a lot of talk of more transparency ... we want to see this at the roadshow," he said.
"Yes, we want to see a turnaround on the dividend," he said.
On the question of Fonterra’s 2018-19 forecast of $6.75 and 25c-35c dividend range, he expected it to decline further, "but not crash", as the season wore on.
"I’d encourage people to makes provisions now for a lower payout," he said.
ASB senior rural economist Nathan Penny said while the combined Danone and Beingmate issues — totalling $588 million — were large, Fonterra’s underlying performance had also deteriorated.
"We’re more concerned with the trend in underlying performance," Mr Penny said.
He noted Fonterra’s earnings before interest and tax (ebit) had now fallen in two consecutive years, and overall was down by about 33% for the period.
"A worrying pattern has developed," Mr Penny said.
Fonterra starts each year "bullishly" with its initial forecasts, but then fails to deliver financial results which match its plans, he said.
Fonterra had struggled to put "financial runs on the board", which includes when the milk price is high or low, he said.
Craigs Investment Partners broker Chris Timms said there had been little in the way of good news for Fonterra recently.
Mr Timms said not paying the second dividend was tangible confirmation Fonterra’s board and management "have missed on their value-added strategy".
"We see little on the horizon to materially improve the current poor situation the business finds itself in," he said.
Fonterra this week maintained its 2018-19 forecast payout at $6.75 per kilogram and ASB’s Mr Penny reiterated his $6.50 prediction, but said farmers should expect a "healthy dividend" from the year ahead.
Fonterra’s interim chief executive Miles Hurrell identified that past forecasting was "too optimistic’, and that the business had to make a move to more realistic forecasting, better identifying both risks and opportunities.
"Even in the years where the milk price is low, profits and dividends have been modest at best," Mr Penny said.
He said the farm-gate milk price, the third-highest in 17 years, continued to be the "silver lining" for farmers from an otherwise "weak performance".
However, Mr Penny queried whether farmers were getting enough, saying they should be able to get both the milk price and dividend.
He said with debt up to $6.2 billion, Fonterra’s balance sheet had been weakened. Its debt gearing ratio rose 4.1 percentage points to 48.4%.
"It wasn’t surprising that Fonterra withheld the second dividend; below that prescribed by the milk price manual," he said.