sign uplog in
Want to go ad-free? Find out how, here.

ANZ agriculture economist Susan Kilsby thinks Fonterra may have to make still further asset write-downs of up to $700 million and may have to withhold some of the milk price payout

ANZ agriculture economist Susan Kilsby thinks Fonterra may have to make still further asset write-downs of up to $700 million and may have to withhold some of the milk price payout

There is a "heightened risk" that Fonterra won’t be able to afford to pay its farmer suppliers the full milk price in the current production season because it will need to make further asset write-downs, ANZ agriculture economist Susan Kilsby says.*

Fonterra's already announced write-downs of about $860 million and an after-tax loss of possibly up to $675 million for the financial year to the end of July. The full results are to be announced by the co-operative next week.

In an ANZ Dairy Update, Kilsby is estimating, however, that another $300 million to $700 million of write-downs might be required into the next financial year. (Please note that ANZ subsequently made corrections to these calculations) See here and here and here.

And if that's the case, she thinks that Fonterra might have to hold back on paying the full milk price to farmers in the current production season.

ANZ, which is the biggest dairy lender in the country, is forecasting that for the current season Fonterra may end up with a milk price of $7 per kilogram of milk solids. Fonterra itself has a wide-ranging forecast of between $6.25 to $7.25 for the milk price this season and re-affirmed that forecast this week.

However, Kilsby estimates that if the further write-downs are required then based on the $300 million to $700 million estimate, as much as 20c to 45c per kilogram of milk solids might have to be withheld by Fonterra to shore up its balance sheet.

"While it is generally assumed that Fonterra will pay its suppliers the Farmgate Milk Price, it is not obliged to," Kilsby said.

"There have been previous instances where Fonterra has elected to pay a lesser price. For example, in the 2013-14 season the theoretical Farmgate Milk Price was $8.93/kg MS, but Fonterra actually paid its suppliers only $8.40/kg MS that season. In that year Fonterra’s earnings were impaired by processing capacity constraints that meant it was unable to manufacture the product mix assumed in the Farmgate Milk Price calculation."

Kilsby has produced a detailed break-down of the further asset write-downs she thinks Fonterra might have to make. These write-downs are on top of the $860 million already announced by Fonterra.

"This further level of profit write-downs would be difficult to absorb within the business unless profitability improves substantially," Kilsby said.

"Therefore there is a risk that Fonterra may have to make a one-off reduction in its milk price payment in order to recover these potential losses. This $300-700m range equates to $0.20-0.45/kg MS.

"Therefore, while our forecast for the calculated Farmgate Milk Price is $7/kg MS for the 2019-20 season, the actual price Fonterra may be able to pay its suppliers could be 20 to 45c less than this."

See here for the full dairy industry payout history.

*This article was amended on October 17, 2019 to reflect the fact that ANZ made subsequent corrections to the calculations made in the original dairy update - specifically relating to valuation of the Beingmate holding.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


And all they had to do was collect the milk, do a bit of processing and sell it on - as milk, milkpowder or what have you.

But no, they had to go and get involved in all sorts of overseas ventures...

... yes .. such a simple business .. a guaranteed success story , provided no one at the top does anything idiotic , such as expand for expansions sake ..

They do have some richly remunerated idiots down at Fonterrible HQ , don't they !

We all now know large multiple owned businesses underperform their shareholders, however more often than not enrich the board and executive. This is not mutually exclusive to Fonterra.

The lack of transparency seems to be the major problem with Fonterra however, and Colin Armer is appropriately asking questions by going to the FMA. He can not fight this alone, and with so many PWC plants on the Board & Executive this is the only way to uncover the rot that PWC are implicated in.

As for ANZ economists commentary, I'd take that with a grain of salt. This lot are fair weather sailors; with Jonkey chief amongst them in command, trying to orchestrate a fire sale to strip this country of more wealth. If I recall, ANZ did the same with Feltex, which is now owned by another one of ANZ's clients in Godfrey Hirst If it means anything, I buy my carpet from NZ owned Cavalier.

Maybe they could get rid of some of the contractors on $1500/day at head office? There's dozens of 'em...

Not that they should be, but wouldn't really scratch 700m.


Lets say they have 150 contractors (it's prob somewhere between 150 & 300), on $1000/day (which is probably closer to averaging $1500/day) since their inception.

So that's $30M/year times 19? years they've been going.

If you can come out with a number from that equation that you think doesn't scratch $700M you live in a different world to most of us.

Over 20 years, sure, but that's not really the relevant timeline here.

Oh, and should we touch the issue off the staff at head office getting bonuses?

They used to be dished out do the reports showed there were less people on <$100K but now there are so many of them over $100K but the bonuses are still there.

wtf do they get bonuses for, there's a lot of people there getting paid extremely good salaries, there should be no such thing as a bonus for any of them.

All of which pales in comparison to the billion dollars the 43 million dollar man gave away, but it doesn't make it right.

Can anyone tell me if they have they made any investments outside of NZ that have been successful?

Or do they sit at 100% failure rate outside of the country?

F should focus on commodity and stay away from consumer packaged goods. These are completely different industries and require different mindset and skill set.

How close are Fonterra getting to their debt covenants?

. . when you're " too big to fail " those debt covenants are a distant fiery glow in the rear vision mirror ..

Speeding towards a taxpayer funded bail-out : moop moop MOOOOOOOOOO !!!!

I've commented before on this but it needs pointing out. Any retention from the milk price will mean 15-25% of the cost is being paid by non shareholders. Fonterra went to great lengths to separate suppliers and shareholders, specifically separating suppliers from the dividend.
Under the above senerio many shareholders will be propped up without paying a cent, the FSF, lessors of farms who retain shares, those with a gaurented price and those with sharemilkers get o only pay 50% (or relevant %).
On top of this, what gaurenties are there that it will return Fonterra to profit from which they can then retain their own money.

Tick, tick, tick

Well when you are paying 6000 employees over 100k each ,you aren't paying monkeys to make monkey decisions are you?

I just switched from a calendar to my watch to count down to when Fonterra is owned by the Chinese

ANZ are that not cream makers.

... we thought they weren't oenophiles either , collectors of fine vintage wines ... but who knew ...


Sucks to be a Fonterra supplier

Who is milking who

The issue is all about directors’ decision. It’s not due to staff, contractors, bonuses. And suppliers elect them.

Totally agree in this context, except for the suppliers electing them, shareholders do the voting , suppliers are meh.

Item about AI replacing directors.

With FSF I would suspect the computing power of an Abacus would be enough to better directors performance.