Not quite like winning Lotto

01/08/2013

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.


The full direct and indirect costs.

24/04/2013

The LabourGreen spin on their power plan is that it will cut the nation’s power bills by up to $700 million a year, lowering household power bills by up to $330 a year, and giving the economy a $450 million annual boost.

Mark Warminger, Portfolio Manager at Milford Asset Management, says that analysis is naïve and does not take into account the full direct and indirect costs.

NZ currently has $253bn of external debt and each 0.01% movement in the cost of debt adds $25m in interest payments. The uncertainty caused by the Labour/Greens Nationaliation by stealth policy is likely to add up to 1% to the cost of debt for New Zealand, due to lenders requiring an increased return for lending to a nation with political and economic instability. The cost of capital for all New Zealand companies will rise due to the same factors. A 1% increase in debt servicing costs for New Zealand’s overseas borrowing, in time would add up to NZ $2.5bn a year to the debt bill.

In addition to higher financing costs for the economy as a whole, the Government would receive around $450m a year less in dividends from the state owned power companies. The state owned power companies would need to write down asset bases by around 30% on an asset base of $15bn. This equates to $4.5bn of capital destroyed.

The flow on effects to New Zealand’s listed power companies is just as detrimental. Analysis suggests that share prices for Contact Energy, TrustPower and Infratil could on average fall by 20%. This is around $1bn loss of wealth for New Zealanders when adjusted for overseas ownership of these companies. On top of this there will be a cut in dividends for the listed companies of say 20%, further reducing returns to New Zealand shareholders. This will adversely affect many KiwiSaver schemes that have direct exposure to these companies.

It seems inevitable should the Labour/ Greens proposal be enacted that the listed power companies would take legal action, based around property rights. This is likely to be lengthy and costly with the Government footing much of the bill.

In conclusion, to save $700m per annum from our total electricity bill the direct and indirect costs of such a scheme would be in the order of the following; $2.5bn in additional debt servicing costs, $450m reduction in dividends, $4.5bn asset write-downs from State owned enterprises, $1bn of capital destruction of the listed power companies and a reduction of $100m of dividends per annum to New Zealand shareholders. In addition, there will be highly skilled jobs lost as power companies reduce capital expenditure and development. In the short term this will not be an issue whilst demand catches up with supply but by the time supply and demand are in balance it will be too late to add additional capacity in a timely manner.

Rolling blackouts anyone?

Other financial advisers have raised similar concerns.

Who do you believe – politicians desperate to be in government or a professional who understands finance and the markets?


Economic sabotage

24/04/2013

Ever since National came to power it has concentrated on making the economy stronger.

It is succeeding but more than a year away from the next election the spectre of a LabourGreen government is providing a hurricane force headwind.

The government has put a lot of effort into policies which encourage savings, investment and export-led growth and LabourGreen are sabotaging that.

The façade behind the Labour-Greens power plan is crumbling as it becomes clear their electricity nationalisation ‘plan’ is nothing more than deliberate economic sabotage for attempted political gain, Economic Development Minister Steven Joyce says.

“Comments made in recent days by Grant Robertson, David Parker, and Russel Norman show they don’t care about the damage to KiwiSaver accounts, mum and dad investors and the wider New Zealand economy,” Mr Joyce says.

“Financial analysts including JB Were, Woodward Partners, Milford Asset Management, First NZ Capital, Devon Funds Management and Forsyth Barr are unanimous in their condemnation. One has labelled it a ‘hand grenade’ to the New Zealand economy, while others have said it will cut the value of every New Zealanders’ KiwiSaver account and lead to rolling blackouts.

“Investment in new power generation would suffer as would wider investment in the New Zealand economy. The National-led Government is focused on attracting investment in new business and jobs for New Zealanders. Labour and the Greens would do the exact opposite.

“Kiwis are deeply suspicious about the Labour-Greens announcement and its timing. It’s simply economic sabotage.

“The great irony is that it’s clear the policy is not worth it for anybody. The last time that we had central planning of the power industry, prices went up faster. Labour’s own Cabinet paper in 2006 said it would push costs up.

“New Zealanders will see it for what it is: a cynical and selfish attempt by left-wing parties to play politics with the value of New Zealand’s economic assets.”

The market isn’t perfect but I’d rather put my faith in it than an army of expensive bureaucrats.

And I’d feel much happier investing in companies that weren’t going to be at risk from government interference.


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