Fonterra's farmers sour on payments, San Lu fallout

Wednesday 24th September 2008

Fonterra Cooperative Group, the world's biggest exporter of dairy products, slashed the value of its stake in Chinese dairy company San Lu by two thirds in the wake of the milk contamination scandal.

Fonterra took a NZ$139 million impairment charge to cover the cost of the product recall and anticipated loss of brand value, reducing the value of its 43% stake in San Lu to NZ$62 million.

The cooperative also cut its forecast milk payment to farmers for the current season by 16% to NZ$6.60 a kilogram, from the record NZ$7.90 it paid last year as world dairy prices fall. Chairman Henry van der Heyden said even with the New Zealand dollar declining there's no certainty that will be enough to offset declining prices.

"A reduction in dairy revenue is likely to halt recent rapid appreciation of rural land prices and rural sector borrowing," said Shamubeel Eaqub, economist at Goldman Sachs JBWere. "As the euphoria of the dairy price surge fades, we expect to see more realistic assessment of asset values."

Van der Heyden said Fonterra reaffirmed its long-term commitment to the Chinese market. It was "frankly appalling" that San Lu had taken so long to inform Fonterra of the crisis, after Chinese government investigations showed it had been investigating complaints of sick infants for eight months.

The writedown and forecast reduced payout are a blow in a week when farmers may have cause to celebrate the US announcement that it wants to join a trade group, P4, to negotiate a free-trade accord. Dairy products would be the biggest winners in gaining access to the US market.

Total sales climbed to NZ$19.5 billion in the 14 months ended July 31. Drought cut its intake by 4.3% to 1,192 million kilograms of milk solids.

By Jonathan Underhill

Comments from our readers

No comments yet