Bascand also mentioned two further influences over the share prices, Global Dairy Trade prices in the longer term and food safety or biosecurity scares in the short term.
While rising world dairy commodity prices are generally negative for Fonterra’s earnings, over the longer term they tend to generate positive investor sentiment.
Significant falls in share price followed the WPC80 botulism scare in August 2013 and the 1080 threat in March 2015.
The earnings of the value-add business in consumer and food service products and specialised ingredients were a key driver of share price performance, given the broad stability of ingredients profitability, excluding stream returns.
Value-add earnings also flowed into investor confidence in Fonterra’s strategy, with recent growth in Asia, Africa, and the Middle East, recovery in Australia and the ongoing strong position in Chile.
But doubts are creeping in concerning the Beingmate relationship in China and the go-it-alone path in recession-hit Brazil and Venezuela.
Bascand trimmed a further cent off his earnings forecast for FY2018 because of the Beingmate loss update (Farmers Weekly, January 29) and said a full mark-to-market impairment would be a one-off, non-cash hit of 23c/share.
Stream returns were becoming less volatile as Fonterra built more facilities to produce reference commodity products (used to calculate the farmgate milk price) and thus avoided having to make non-reference products when it was unfavourable to do so.
Whereas, in previous financial years, stream returns had added or subtracted hundreds of millions of dollars to results, in FY2017 they were $40 million negative and this financial year estimated to be $10m negative.
The third major influence on share price was farmers’ supply share needs, where the $10 billion closed market (FCG) drove the $800m Fonterra Shareholders’ Fund (FSF) unit market.
In December and January farmers were required to “share up” in the co-operative, typically driving prices higher.
In June, farmers leaving the co-operative or lowering their milk volumes could sell shares, resulting in a declining share price.
This January FCG began and ended the month about $6.35 and sharply peaked at $6.68 on January 12, the action date for Enforced Compliance Trading (Farmers Weekly, January 15).
