The recession and commodity markets have forced Fonterra to cut its share price by 19% for the 2008/2009 season, wiping nearly $1 billion off the company’s value in a year it would rather forget.

The world’s largest dairy exporter and New Zealand’s largest corporate has projected a conservative payout price for the next season while reaffirming its outlook for the current year – despite recent developments in the US, which saw the reinstatement of export subsidies..

The co-operative has set its Fair Value Share price for 2008/2009 at $4.52, down $1.05 on the 2007/2008 price of $5.57.

Given that analysts have picked Fonterra’s production to go up by between 5-8%, to 1.25-1.29 billion kgMS this season (it was 1.192 billion in last years drought riddled season), this equates to between $800 million and $1 billion in the co-operative’s value lost over the last year.

The lower price is largely the result of the major changes in global equity and financial markets over the past year, Mr van der Heyden says.

Fonterra’s farmers are required to buy a share for each kilogram of milksolids (kgMS) supplied.

It also announced a forecasted payout of $4.55 kgMS for the 2009/10 season, a 75c drop on the projected payout of $5.20 kgMS for the season currently wrapping up.

This consists of $4.55 per kgMS comprises a Milk Price of $4.10 and Value Return of 45 cents per kgMS.

This compares with a forecast Milk Price of $4.75 and a Value Return of 45 cents for the current 2008/09 season.

“We remain on track to achieve the $5.20 per kgMS, and we have said to our farmers that anything above $5.20 is likely to be retained,” chairman Henry van der Heyden says.

This means, all things remaining constant, that projected payouts between this season and the next will be down around $800 million.

After last year's record payout of $7.90kgMS (24c of which was retained), Fonterra's farmers collectively are out of pocket $2.4 billion to $2.6 billion between this season and the last, and by proxy the economy.

The 2009/2010 projected payout figure reflects the projected continuation of low commodity prices, which have plummeted by 66% since mid 2007, and the volatility of the New Zealand dollar, which has climbed back above 60c to the USD.

“Our hedging policy is designed to take out the volatility and provide as much certainty for our farmers as possible. But as a rule of thumb a 1 cent movement in the exchange rate realised over a year has an impact of about +/- 10 cents per kgMS in the Milk Price, with everything else being equal,” he says.
 
With farmers’ cashflows extremely tight the board had also decided to bring forward to August this year a payment of 20c of the 45cs of the Value Return for the current 2008/09 season.

The April payment, which totals about $250 million, was previously deferred to October.

The company has also decided to continue its policy of refusing contract milk (third party or oversupplied milk that does not require the supplier to buy shares) into the 2009/2010 season to protect the company’s books.