Fonterra is now highly vulnerable as its share value continues to slide and asset disposal slows but holding back on payout is a simple mechanism to save it.
“All it would involve is taking 50c a kilogram of milksolids off the payout as retentions.
“They would deal to their debt reduction challenge right there and would still own Tip Top if they had done this earlier instead.”
While the co-ops management might maintain the milk price model dictates the payout he disputes that and points to the co-operative’s practice of stretching milk payments by about 50c from dividends and retentions over the years.
“If you go this way, yes, there will be some tears but I suspect considerably less if Fonterra is honest and shares with their shareholder farmers the enormity of what they face.”
That includes the real risk company value continues to slide, regardless of assets sales.
And vulnerability to overseas sale becomes a stark reality.
The risk of accelerated value slide could arise as other assets are disposed of and sales occur at a loss against book value.
The sale of Venezuelan assets in that strife-torn country recorded a book loss of $123 million.
Its Chinese dairy farms and Beingmate are touted as next up, with some fearing significant discounts might also occur there.
In the past year alone Fonterra’s share value has slipped from $5.20 a share to $3.68, representing a loss in company value of about $2.28 billion.
“Fonterra is simply too important to NZ Inc to fail, irrespective of what your politics are or what you may or may not think about dairy farming.
“Nor as a nation can we stand by and let Fonterra be sold offshore.
“As it is, I believe we should never have let Westland go either.”
Industry analyst Peter Fraser has cautioned Fonterra is approaching an event horizon where it will go past the point of no return as company value slips against debt levels.
Lockhart is far from convinced Fonterra is a lost cause but agrees action is needed sooner than later.
And the timing to claw back some payment from shareholders might never be better.
Prospects for milk price are relatively positive despite the wide forecast band. The ability of any disgruntled shareholders to jump ship to competing companies is also limited.
“The immediate threat of local competition is quite diminished right now.
“And we are in the best part of the season to do it.
“It is just the start of the season, their obligation to farmers on how much to pay is still flexible.”
Lockhart ruefully noted earlier action by management, even as late as last year could have seen some money retained then, reducing the amount required now.
“It could have been 25c a kg MS held back late last year and 25c a kg MS held back early this year and it would be sorted.”
The positive payout was buoyed by a weaker dollar, making action sooner than later even more compelling.
With this season’s payout appearing to give farmers about $5.80/kg MS by next May the debt could be moderated by taking 30c/kg out by next June.
“And they would be half way there and then you take the balance out of the retro payments that come in between June and October next year.
“It is far easier to do it with the forecast we have (about $7) than if it had a five in front.”
He noted while it would hurt some indebted farmers having more payout retained it would be better for the entire co-operative.
“If you were a director at Fonterra right now, surely you are sitting there thinking this.”
Lockhart is concerned Fonterra management might not appreciate the criticism and become defensive but it is far too important to not comment on.
While some farmers don’t view Fonterra’s share value as critical to them that doesn’t make sense.
“It is a direct reflection of the wealth of the business.
“The whole share issue is a monster created through Trading Among Farmers (TAF).
“You can’t run away from the share price unless you want to buy those shares back and Fonterra does not have the funds to do that.”
He suspects Fonterra’s bankers will be more actively involved as they witness the share slide.
“It seems in the past the shareholders (farmers) have been rewarded at the co-op’s expense.”
He agrees with Fraser’s description that Westland’s sale was a dress rehearsal for Fonterra’s main act if things get worse but believes there is still time to act to avoid it becoming reality.
“Sitting out there is this enormous lever called milk price and they need to pull it.”
