Bumper payout from Fonterra

Fonterra yesterday warned the strong kiwi dollar would crimp gains for the coming year as it disclosed its second-largest payout since it was created just under four years ago.

Its almost 12,000 farmer shareholders will get $4.59 for every kilogram of milk solids they produced in the 2004-05 season, up from $4.25 the previous year and 9c above the forecast made in May.

The rise reflected a season of strong commodity prices, with demand met despite lower milk supply, following the wet spring and dry summer.

For the average dairy farmer the increase will represent an extra $16,000, taking farm revenue to just under $400,000.

But the increased payout was offset by a 3.5 per cent decline in production from 90,000kg per farmer last year to around 86,850kg this year.

Fonterra sells yoghurt, cheese, spreads and food supplements in 140 countries under the Anchor, Fernleaf, Anlene and Soprole brands and generates a fifth of New Zealand's export revenue.

Dairy Farmers of New Zealand chairman Frank Brenmuhl said the payout, worth $5.3 billion and an increase of $225 million over the previous year, would benefit rural areas and the entire economy.

Fonterra chief executive Andrew Ferrier said this year the co-operative would struggle to lock in the favourable 2004-05 exchange rate of 61USc to the dollar.

"We do see the exchange rate having a more significant impact this year. We do not see the price rises that have offset previous exchange rates in the market.

"We are projecting lower returns next year.

"We are at the absolute top in some markets, we see demand coming off. That is a signal that pricing cannot go any higher."

However, Ferrier expects commodity prices to remain where they for the next six months at least.

In May, Fonterra forecast a payout for the 2005-06 season of $3.85/kg of milk solids - the same as the beginning of last season. This forecast was based on an average exchange rate of around 69USc to 70USc and commodity prices remaining constant.

Chairman Henry van der Heyden would not speculate on the impact of the recent weakness of the dollar, now below 68USc. The co-operative makes its next forecast for this season in September.

Fonterra's total revenue for the year was up by $493 million to $12.3 billion. The major contributors were Fonterra Ingredients' revenue of $8.6 billion (excluding $1.4 billion in intercompany sales) and Fonterra Brands' revenue of $3.8 billion (also excluding intercompany sales of $59 million).

Total operating expenses fell by $131 million to $1.7 billion, reflecting lower offshore operating costs, largely as a result of the stronger dollar. It delivered a $90 million increase in gross margin to $2.2 billion, even with the increased milk price paid to shareholders.

Retained earnings amounted to $191 million, including gains from share sales after failed takeover bids. The co-operative lost its bid for rural services group Wrightson to former Fonterra chief executive Craig Norgate and his Rural Portfolio Investments. A bid for Australia's National Foods was trumped by Philippines brewer San Miguel.

Total shareholder return for 2004-05 was 17.2 per cent compared with 11 per cent the previous year.

Fonterra's fair value share price increased from $4.69 in 2004-05 to $5.44 this year. The price represents the estimated value that Fonterra is going to return to its shareholders long-term, over and above the value of their milk at the farm gate.

- additional reporting: agencies

Fonterra payouts

2005/06 3.85/kg milksolids*
2004/05 $4.59
2003/04 $4.25
2002/03 $3.63
2001/02 $5.33 (formation year)
*forecast