Dairy trumps wool

12/01/2013

Fonterra Shareholders Fund units jumped 26% on their first day of trading and will tip wool carpet maker Cavalier Corp out of the benchmark NZX 50 index this month.

The Fonterra fund, which has surged by a third from their $5.50 offer price, has met the ranking and liquidity requirements and will join the benchmark index on Jan. 21, the stock exchange operator said in a statement after the close of business.

Cavalier, which has shed 23 percent over the past 12 months, will leave the top 50 being the lowest ranked stock.

Units in the Fonterra fund, which give investors a slice of Fonterra Cooperative Group’s dividend stream, rose 0.8 percent to $7.31 in trading today, while Cavalier shares gained 1.8 percent to $1.71. . . .

Given Fonterra is New Zealand’s biggest company it’s not surprising it is seen as an attractive investment. Cavalier is a much smaller operation.

However, the fortunes of the FSF units so farand Cavalier on the NZX 50 index is a reflection of dairy and wool farming.

Dairy conversions, while slowing from the peak, are still going ahead and wool is in the doldrums – again.

Wool ticks so many marketing boxes  free range, renewable, sustainably grown. It ought to just about sell itself.

But in spite of initiatives like Campaign for Wool demand is low and the price reflects that.

Fonterra’s forecast payout for this year is down on last year’s but the outlook for dairy is still far better than for wool.

However, Hugh Stringleman thinks Fonterra suppliers might have mixed feelings about the the increased price of shares:

Since Trading Among Farmers (TAF) was launched about $300,000 has been added to the share capital of the average Fonterra supplying farm.

That increases the temptation to redeem all or part of that capital to apply elsewhere in the farming business, where it would earn a better return and perhaps supply a Fonterra competitor.

Also, milk production increases averaging 5% nationwide in the season to date mean Fonterra farmers will eventually have to “share-up” (purchase new shares to match increased production) at the much higher market prices.

This will be especially important for recent conversions with expanding milk production in regions like Canterbury, which is 11% up on last season.

The new three-year rolling average share standard will, however, moderate the compliance cost for established farmers who most-recently increased their share holdings by 10% or more at $4.52/share, following the 2011-12 record milk season.

The high turnover of units, totalling two-thirds of the issue volume in fewer than 30 trading days since launch, shows the depth of investor interest in New Zealand dairying and in Fonterra in particular.

However, it also means the market tail is wagging vigorously, feeding farmers’ concerns over possible effects on the dog.

Is a well-informed market sure that higher world dairy prices are in prospect or is an investment bubble growing?

Will the high unit and share prices reinforce dairy farm values through demand from expanding farming families, corporate farmers and syndicates?

On the other hand, Fonterra’s forecast dividend of 32c reduces in yield as the unit and share prices climb, for farmer-shareholders and unit investors. . .

The international demand for milk is expected to increase and the end of the season looks better than the start did.

But it’s very early days to be drawing conclusions on the future prospects for the share price.


Mainland betters NZX-50

30/07/2008

We call it the Mainland with our tongues in our cheeks but now we have the numbers to prove we’re weathering economic tough times better than the north.

The Deloitte South Island Index measures the market capitalisation of 33 companies with head offices or the majority of their business in the South Island and puts them into an index relative to their size.

For the first six months of this year, the index was down by 8.5 per cent, beating New Zealand’s benchmark NZX-50 index which fell 21 per cent. Over the last quarter (April to June) it has risen into positive territory, growing 3 per cent versus the NZX-50’s drop of 8 per cent.

However, doing better isn’t the same as doing well as Deloitte partner Paul Munro points out:

At a headline level it shows South Island companies are doing better than the rest of the country, but we need to balance that out with the fact that of the 33 companies measured 61 per cent saw a drop in their market capitalisation.”

Munro said the strong performance over the last quarter had been boosted by larger companies like PGG Wrightson and NZ Farming Systems Uruguay.

PGG Wrightson, the second largest company on the index, grew its market cap by $127 million, boosted by a higher share price and $5 million in bonus shares being issued, while NZ Farming Systems Uruguay saw its market cap increase by $83 million on the back of a rising share price driven by predicted increased earnings. Munro said their strength followed the boom in the dairy sector with record milk solid payouts.

He said this sector was having a positive impact on other businesses and because a greater proportion of business in the South Island was linked to dairying it was helping to hold up the economy.

It’s not all down to dairying, but the record payout from Fonterra and the continuation of conversions from sheep to dairy farms are pouring money into rural communities. That in turn is insulating the provinces from the worst effects of the recession.


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