New Zealand-New crisis in dairy industry.

NEW ZEALAND-Fonterra’s latest balance sheet is misleading and discloses some trends of concern, according to former University of Canterbury accounting lecturer Alan Robb, a commentator on co-operatives.

Robb takes issue with the way Fonterra reports a debt-to-debt-plus-equity ratio, by confining the debts to interest-bearing ones and not including all liabilities. He said this has been a trend in company reporting during the easy credit era, out of a wish to make financial risks appear smaller.

"But it is a misleading representation of financial risk, as a company’s non-interest bearing liabilities could be increasing while its debt stays level," he said.

Robb wants all liabilities included under the definition of "debt", which would have the effect of lifting Fonterra’s last balance sheet ratio from 57.4%, as reported, to 70.4%.

But if Fonterra was to use the traditional debt-to-equity ratio, the number balloons to 238%, well up on the 2007 figure of 171% and 154% in 2006.

Robb has also drawn attention to a rise in inventory value, when the main reason Fonterra moved to a July 31 balance date was to have more selling time and reduce the judgment surrounding inventory valuation.

He claimed the significance is Fonterra’s vulnerability to the falls in commodity prices which have occurred since balance date, which might need inventory write downs.

Fonterra’s chief financial officer, Guy Cowan, said Robb had not taken into account the high world prices at balance date and that inventory volumes went down compared with the previous year.

"You would expect that, given the high prices and demand for our products," he said.

"Also, the majority of product stocks are sold on contract prices at balance date, which becomes the inventory value and are not at risk of subsequent write down."

Robb highlighted the overdue receivables, which have nearly doubled as a percentage of total receivables.

Cowan responded that Fonterra had no problem with the level of overdue accounts and had made full provision for anything unlikely to be paid.It sold to big reputable companies on long-dated contracts, he said.

In the lead up to a retail bond issue, Fitch Ratings had confirmed Fonterra’s AA minus status and stable outlook, Cowan said.Fitch had gone in depth into Fonterra’s accounts and not relied on just the latest published ones.

It had commented favourably on prudent measures to strengthen the balance sheet, such as the payout retention, reduction of working capital and operating costs, deferral of non-essential capital expenditure and divestment of non-strategic assets.

Robb warned of the size of intangibles on the balance sheet, now 20% of total assets and equal to 66% of equity.

He said there was no security value to intangibles like brand valuations."The value of brands can evaporate quickly in a recession."

Cowan replied that brand valuations are independently reviewed and are based on future earnings."We have encouraging projections of consumer goods sales underpinning those valuations."

Cowan said Fonterra is in a very strong financial position, with strong banking relationships, some $3 billion of stand-by facilities and would be making a retail bond issue soon.

Shareholders Council chairman Blue Read said it had raised some of Robb’s points with the company and received satisfactory answers.

The council supported the balance sheet strengthening, including payout retention to offset the share redemptions due to drought, because of the "tumultuous times".

"But Fonterra is in a uniquely strong position, as a co-operative, because recourse to subordination of payouts is a major plus for financial security," Read said.

Fonterra’s major cost of business is milk purchase and it has the power to reduce the price any time it needs to. That makes farmers like lenders of last resort.