A drop of nearly 20% in Fonterra's share value was not unexpected, but some economists thought it could have fallen further.
Fonterra yesterday announced a 19.7%, or $1.10, drop in the value of its fair value share for the coming season, from $5.57 to $4.47, blaming weak markets, the international credit crunch, the write-off of its Sanlu investment in China and the increased cost of capital.
It has been a costly month for dairy farmers.
The falling share price, combined with last month's 60c slashing in the forecast payout for the coming season to $6 a kg of milk solids (kg m/s), left little doubt the dairy boom was over.
Fonterra suppliers must own one share for every kg m/s they produce, and for a farmer supplying 200,000 kg m/s a year, the lower payout reduced income by $380,000 compared with last year, and now the lower share price removed a further $220,000 from their balance sheet.
Based on Fonterra collecting 1.3 billion kg m/s a year, the lower share prices reduced the worth of the country's largest company by $1.5 billion.
This is the second consecutive year Fonterra has lowered its fair value share, with $1.22 wiped off the value of each share last year. It peaked at $6.79 in 2006-07.
The drop in share value last year was partly attributed to the initial onset of the credit crunch and high commodity prices affected margins in its ingredients business.
This year's independent valuation of the business by Duff and Phelps estimated Fonterra's value between $4.14 and $4.80, with the Fonterra board selecting the mid-point.
Westpac economist Doug Steel said he was surprised the board did not select a lower value as all sharemarkets and share values were suffering and Fonterra was not immune.
"I though maybe the low $4, without putting a number on it."
He said the 20% decline would be bad news for farmers, but it was indicative of the fact New Zealand was being affected by the global financial meltdown.
Equally, food producers should benefit from lower interest rates and market intervention by Governments around the world.
Dairy farmers, in general, had strong balance sheets after a period in which land values had soared, there had been high payouts, and Fonterra's share price had also been strong.
"As a whole, balance sheets for dairy farmers across the industry are not too bad compared to five or six years ago."
Mr Steel reiterated his forecast of a $6 a kg m/s payout for this season saying he had factored in the negative global economic conditions.
Fonterra chairman Henry van der Heyden said those global economic difficulties had been partly offset by a lower New Zealand dollar.
The valuer had concluded the share price of comparable listed companies around the world had fallen between 25% and 35% since the last valuation.
"Although as a co-operative our share price does not reflect daily market fluctuations, we are not immune to the same pressures that have affected listed companies," Mr van der Heyden said.
While the global financial landscape was volatile, he said the valuation was the best possible assessment at this time.
"The board is mindful of its obligations to seek a review of the valuation should circumstances change substantially."
Fonterra's share value
2002-03 $4.38
2003-04 $4.69
2004-05 $5.44
2005-06 $6.56
2206-07 $6.79
2007-08 $5.57
2008-09 $4.47
