Fonterra worry sparks interest in swap

Warnings about the strong dollar cutting Fonterra's payout to dairy farmers have led to an increase in the number of inquiries about Dairy Equity's swap scheme, the firm says.

Dairy Equity last month raised a "cash box" of more than $92 million to pay farmers for beneficial rights to the value-added portion of payout and capital gains on their Fonterra shares.

By late September, the company had committed to acquiring beneficial ownership of $2.2 million worth. It said it expected farmers to enter into more swap deals as the end of the season approached.

Dairy Equity manager Geoff Taylor said last week that indications from Fonterra that the payout could fall because of a strong dollar had led to more inquiries about the scheme from professionals advising farmers.

He said Dairy Equity's analysis was that, if the dollar stayed at US66c, Fonterra's payout would be down on its current $4.05/kg of milk solids forecast by at least 5c/kg - 2c/kg in the commodity milk price component of payout and 3c/kg in the value-added component related to activities such as branded consumer products.

While the currency may drop and increase NZ dollar returns to farmers, "for the moment the dough's not there", said Taylor.

At the same time, farmers had been facing higher costs, increasing their financial pressures.

Even if Fonterra achieved its target of the value-added part of the payout being 45c/kg, this represented a yield of "about" 6 per cent, he said.

(Farmers have to hold a Fonterra share, currently worth $6.56, for every kg of milk solids they supply. Based on that price, a 45c/kg value-added "dividend" would be a return per share of 6.85 per cent.)

"So for those farmers with debt it just simply improves the cash performance of the farm to be able to [get cash for beneficial rights to their shares], forgo the 45c/kg and repay debt at 9 per cent," said Taylor.

"When there are pressures on profitability and the farmer gets more uncomfortable in borrowing money, this just becomes a more compelling alternative because it's cashflow-positive."

A fall in the expected value-added returns could also hit Dairy Equity's revenue and the price it is prepared to pay for shares.

Taylor said Dairy Equity was committed to paying $6.56 per share for swaps already agreed to.

But he said prices paid for shares in future would take into account Fonterra's mid-December prediction for next season's share price, plus Dairy Equity's ongoing calculations of what the value-added portion of the payout would end up being.

Meanwhile, Taylor said the company had been pitching its product to entities such as schools, universities and airports, which had significant capital locked up in Fonterra through dairy farms that were a non-core part of their business.

Several of them had not yet decided about cashing up, he said.

"The types of entities we're talking to means that some of those transactions could be material."

Taylor believed that the success of Fonterra's rival Open Country Cheese, of which he is a director, had more farmers looking at Dairy Equity.

"The two aren't related but I think ... rather than viewing anything as anti-Fonterra, farmers are just more prepared to look at legitimate alternatives."

Dairy Equity's part-paid shares closed at 46c on Friday, compared to their listing price of 50c.

Dairy dealing

* After reports the high dollar may cut Fonterra's payout, Dairy Equity says there is increased dairy farmer interest in its scheme swapping cash for beneficial rights to co-op shares.

* Also, schools, universities and airports are among entities with "non-core" dairy farms said to be interested in deals.

* But the price Dairy Equity is prepared to pay may be affected by December's forecast of next season's Fonterra share price, plus Dairy Equity's view on whether Fonterra's value-added returns target will be met.