Fonterra’s Valuation and PayoutMonday, Jun 2, 2003
The announcement last week, by Fonterra, of the “Fair Value Share” brought into focus the confusion that surrounds many of formulas that have been taken on or imposed on Fonterra by the enabling legislation.
The Fair Value Share is too complex and too remote for the majority of shareholders to respond to. It has in effect been accepted as a “price” extracted by Government for enabling the merger on the basis that some analytical performance measurement was required. But last weeks announcement highlights the futility of the measurement of capital performance by criteria that is barely relevant to the suppliers of the capital.
Most shareholders do not see the increased value of the Fair Value Share as anything more than a transfer of notional value from pocket “farm value” to pocket “share value”. The combined value of the asset “dairy farm” still remains the same. A value set by whatever is the current pricing per kg of milksolids that has been paid for farms in that district. It is the willing buyer – willing seller of the farm property scenario that is the final arbiter of the value of Fonterra’s share to the shareholder in spite of S & P’s expensive fancy footwork in coming to a valuation range.
Also the Fair Value Share measurement process seems to be a very indirect tool to provide Fonterra’s Chairman with PR figures which have enabled him to make a claim that Fonterra is making real progress on capital growth and improved operational efficiency on the back of a lowered payout. Could there not be a better way at arriving at this description?
Or even more simplistically is not payout measuring Fonterra’s success?
In the final count farmers are generally only interested in the welfare of their households now and their superannuation later and they have little experience of unrealised loss/gain risks written on bits of paper.
Farmers know the reality of livestock losses from disease or climate disasters, they know of loss or gain when land or livestock values fluctuate but they have little experience of DCF’s, CMP’s VAC’s.etc but do know a good or a bad AMR!
It’s my guess that this category of dairy farmer is the main contingent of the 50% who did not bother to vote in the recent director’s election plus I would guess quite a few who did vote are also just as bewildered.
Fonterra has a massive task in regaining supplier confidence. The gauge measuring supplier trust and confidence is verging on empty. This season’s payout comparisons with Westland and Tatua will move from being understandable to intolerable
How can Fonterra get it right?
While it appears much of the initial focus of Fonterra executives has been on the cutting of costs and the pruning of excesses it seems that the marketers are not recovering sufficient premium from the market for the products produced.
Furthermore is Fonterra really able to act in a competitive manner with the companies that are now so easily outperforming it in payout?
Fonterra needs to get it’s A into G