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Fonterra's VAC decision may hurt income at Dairy Equity

Monday 7th July 2008

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Dairy Equity, the company that allows investors to gain exposure to Fonterra Cooperative Group, said the company's income may be dented this year if the cooperative decides to retain part of last season's milk payments.

Shareholders of Dairy Equity may not receive any more Value Added Component (VAC) payments from Fonterra for the season ended May 31 because of the possible retention, chairman Peter Jensen said in a statement.

Fonterra has said it is considering retaining 30 cents a kilogram of milk solids, which would be enough to eat up VAC returns, Jensen said. It would cost Dairy Equity about NZ$880,000, or about 2 cents a share, in lost income this year, after allowing for the impact of drought.

Dairy Equity stock was last at 37 cents and has dropped about 20% since mid-March.

The company was set up in 2006 to give shareholders exposure to the dairy industry, New Zealand's biggest exporter, which is dominated by the farmer-owned Fonterra. It acquires the beneficial ownership of Fonterra's Fair Value Shares through its 'SWAP' agreement, which allows farmers to transfer beneficial ownership of the securities while retaining supply and voting rights.

By Jonathan Underhill

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