Farmers expected to be cautious with Fonterra windfall

With the sale of the Mainland Group to French company Lactalis now completed, Fonterra farmer-shareholders have been paid out an average sum of $400,000, a lump of money sure to ease the pain of parting with iconic brands such as Anchor and Kāpiti. ASB has crunched the numbers, and expects around half of that to go towards savings and debt repayments. As ASB Chief Economist Nick Tuffley explains, paying off debt might not be very exciting, but it can certainly have its benefits:

“In the past number of years there has been a lot more of a focus on financial resilience. This cash return further goes and reinforces that the dairy sector is going to be in a much more resilient position to weather the ups and downs, and the uncertainties that we can certainly see in the global environment.”

This of course leaves the other half to be spent on more discretionary items, with Tuffley expecting a decent part of it to be re-invested back into farming operations, with some potentially even left over for more personal purchases:

“Some areas that are likely to benefit a lot are areas where there's a lot of rental activity happening, say equipment rental for example. The retail sector and manufacturing also look like they will tend to benefit quite strongly from increases in spending by dairy farmers.”

However, Tuffley adds that we shouldn’t expect a mad splurge from Fonterra shareholders, as their engagements with the agricultural sector show many prefer to take a more cautious, long-term approach to large payouts such as these:

“One of the messages that has been coming back to us from farmers is that they’re not rushing out to spend the funds. That's also what we see as being a prudent approach by farmers, is to sit back, talk to some trusted advisors, get advice on how to consider using the funds and what's best for their particular circumstances. We think it will take a little bit to come through, and obviously we're in an environment where there's a bit of uncertainty. We've got the oil price shock coming through at the moment and that's probably a reason for farmers to be a little bit cautious in the short-term about committing to some large expenditure.”