Not quite like winning Lotto

The 50 cent increase in Fonterra’s forecast payout announced yesterday will mean another $500,000 for farms producing a million kilos of milk solids.

One farmer described it as like winning Lotto but it’s not quite like that.

It doesn’t come from gambling a few dollars and luck. It’s the result of a large investment and a lot of hard work by the farmers and their staff, and by Fonterra and its board and staff.

But it is good news for farmers and the wider economy:

. . . While dairy farmers aren’t getting too ahead of themselves, economists are not only predicting higher milk prices but also increased production. Economists predict the lift in milk prices and an increase in milk production could boost the New Zealand economy by $3.5 billion. . .

The high payout provides reassurance for farmers who feared that enabling shares to be traded would come at their cost:

. . .But what’s great news for Fonterra’s farmers and the economy is not such good news for outsiders who invested in the Fonterra Shareholders’ Fund.

The more Fonterra pays for its raw milk, the worse it gets for them.

The forecast milk price is going up fast, but Fonterra’s share price fell today. It seems that for investors, Fonterra can have too much of a good thing.

“The increased payments to farmers actually results in higher costs to Fonterra and therefore lower profit margins made on its products that it sells to the consumer,” says Brooke Bone of Milford Asset Management.

Investors in the Fonterra Shareholders’ Fund don’t receive the raw milk payout. They receive dividends from the money Fonterra earns turning that raw milk into finished products, and that market’s just getting tougher. . .

The higher payout will make dairying more attractive for those considering expanding or converting and the lower share price will make it a little easier for those who then choose to supply Fonterra.

There is one similarity between a Lotto win and the higher payout – both provide opportunities and choices.

But most farmers will put most, if not all the extra money into the business – reducing debt, upgrading plant and machinery, environmental enhancement . . . there’s a long list of things on which the money could be spent and there will be tax to pay on it.

As more than one has commented, if they won Lotto, they’d just keep farming til it was gone.

One Response to Not quite like winning Lotto

  1. scrubone says:

    “The harder I work, the luckier I get.” – Samuel Goldwyn

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