A milk tanker leaves the Te Rapa Fonterra Dairy Factory.
Wellington: Fitch Ratings has praised Fonterra Cooperative Group’s decision to hold the forecast payout to farmers and slashing its dividend by two-thirds amid a growing gap in prices between milk powders and its cheese and casein products.
The Auckland-based company’s decision is “characteristic of the fiscal discipline that underscores its credit rating,” Fitch said in a statement. Fonterra has an AA rating. Earlier this month the cooperative surprised analysts by holding the forecast payout for this season at a record $8.30 per kilogram of milk solids and cutting its expected dividend to 10 cents from 32 cents.
The board used its discretionary power to keep the milk price unchanged, as the rising price of milk powder meant it should have hiked it to $9/kgMS under the regulated rules of its Farmgate Milk Price Manual.
“Fonterra has used its leadership position in the New Zealand dairy industry to regulate production and protect the long-term fortunes of farmers,” Fitch analysts Johann Kenny and Vicky Melbourne said in a note.
“The lower milk price will act as a deflator to New Zealand milk production and protect the industry from adding capacity on cyclical extremes.”
Prices for rennet casein rose 7.3 percent and cheese 1 percent in today’s Fonterra-run GlobalDairyTrade auction, while whole milk powder prices fell 1.5 percent. About 70 percent of Fonterra’s production capacity is for milk powder, with the rest of its plant making casein and cheese.
Units in the Fonterra Shareholders’ Fund slumped below their $5.50 offer price for the first time after the dividend was cut, and have since come back closing at $5.78 on Tuesday.
— NZ Herald