Fonterra’s milk price manual

milkThe Commerce Commission today released its draft report on its statutory review of Fonterra’s milk price manual for the 2015/16 dairy season.

This comes at a time when Standard & Poor’s has downgraded the cooperative’s credit rating from “A”to  “A minus” in the face of its debt levels. This effectively means the dairy giant will face higher borrowing costs in the wake of S&P’s view that its risk profile has enfeebled over the past two years.

Milford Asset Management senior equity analyst, Brooke Bone, said despite the downgrade, Fonterra should not have problems raising capital.

“It is a very, very high credit rating so I don’t think it will make it much more difficult for them to do it.

“I think this is more of a warning shot from S&P that if Fonterra continues to invest in this way, where it has less control over its assets than it has done historically, that it may continue to see a downward trend within that rating.”

S&P analyst Brenda Wardlaw said this transaction is happening at a time when Fonterra is also investing $555 million in plant expansion and optimisation in New Zealand. She added that Fonterra has good financial flexibility in setting milk price forecasts, which underpins the A category rating on the group.

The farmer shareholder payout is forecast at $5 to $5.10 a kg.

Fonterra lowered its forecast payout progressively during the year t0 July 31 in response to significant decline in global dairy product prices.

Today’s manual sets out how Fonterra will calculate how much it will pay dairy farmers for raw milk.

The commission is required to report annually on the extent to which the manual promotes the setting of a base milk price that provides incentives for Fonterra to operate efficiently, while providing for “contestability” in the market for the purchase of milk from farmers.

Deputy chair Sue Begg said the commission’s draft finding is that the 2015/16 manual is largely consistent with the purpose of the milk price monitoring regime under the Dairy Industry Restructuring Act 2001.

“While much of the anual remains unchanged from last year, the amendments Fonterra has made this year improve the manual’s consistency with the overall purpose of the regime. We are pleased with the steady progress being made year on year,” she said.

“Our draft report encourages Fonterra to continue improving the clarity of the rules in the manual and its disclosures on their use so interested parties can better see how Fonterra would interpret and apply them.”

Additionally, the draft report recommends that Fonterra consider some further issues, such as how the financing costs of interest-free loans made to farmers should be treated in calculating the base milk price and whether winter milk premiums should be explicitly provided for in the manual.

The commission will further review how Fonterra applies the manual when it assesses the 2015/16 base milk price calculation at the end of the current dairy season.

At last month’s results presentation, Fonterra said its gearing ratio rose to 49.7 per cent from 42.3 per cent a year earlier, but was 46.4 per cent when adjusted for a $900 million advance payment to farmers. The cooperative has in the past aimed for a gearing ratio of 40 to 45 per cent.

The slump in commodities prices was reflected in Fonterra’s revenue for the year at $18.8 billion, down 15 per cent on the previous year.

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