The dairy debt irony

The announcement yesterday that Fonterra is predicting an increased payout for its shareholders highlighted the difference in management strategys of Dairy Companies. In a very difficult year the company with the most debt Fonterra (now with a 61% gearing) is paying its farmers more whilst Westland Milk Products a co-op with a very low debt, is predicting an unsustainable payout for 2008/09.  Ironic I feel, but reflects the fine line executives run to compete in a tough market, at the same time keeping their shareholders financially secure.   But it appears there could be a change in the wings. Both Companys have appointed new decision makers that have announced their goals on the debt . Reining in Fonterra's debt is high on the agenda for new chief financial officer (CFO) Jonathan Mason reports The Rural News. He admits Fonterra's debt gearing is "˜too high' but remains confident it will ease by July, the end of the cooperative's 2008-09 financial year. Fonterra has set internal targets to rein in debt gearing that soared to 61.5% in January compared to 57.4% in July last year. The cooperative has blamed the high debt gearing on the costs of carrying higher inventories and a higher advance rate paid to suppliers, which cost it an additional $700m above the normal payment schedule. Despite this season's dismal payout forecast the future is bright for Westland suppliers, says Rod Quin, the Hokitika-based cooperative's new chief executive says in the Rural News. Milk supply has been growing at an average 8% per year and the cooperative continues to encourage expansion. Quin won't comment on whether Westland will revise its $4.10-4.50/kgMS payout forecast until he has had district meetings with suppliers in early June. However he does hint debt restructuring may also be on the agenda.